Transcription
In today's video, I'm going to share with you my secret weapon, the tool that I use to help my clients stay the course in scary and good times so that they could ultimately achieve their goals. In my 20 years as a financial adviser, I've never seen one piece of paper, one chart have such a positive impact on people. And I'm going to share that with you.
But first, it's important we understand a little bit about market corrections because that's what we're all worried about, right? We're told we have to diversify so that we buffer out market volatility, but we all like the upside volatility. It's the downside. It's the market crashes that we worry about.
So, we're going to start off with an excellent report by Morning Star. It's called uh what we've learned from 150 years of stock market crashes. And in this report, they show a chart. This is not the chart that we're going for, but they show a chart that shows the stock market history going back to 1870. And what I like about this chart is it shows the scary periods over over that period of time. The stock market of course goes from lower left to upper right, which is what we want. But it also puts into perspective the the uh the Great Depression, World War I, World War II where it happened, the the history of the height of the cold uh cold war and the Cuban missile crisis, the inflation in Vietnam period, the last decade uh where the market stock market basically did nothing for uh an entire decade and it also shows the great financial crisis COVID etc. But throughout that all uh the market goes from lower left to upper right and morning star report says so what does this history tell us about navigating volatile markets mainly that they're worth navigating.
Now again, this is not the chart, but they go on to say, but since the path to recovery is so uncertain, the best way to be prepared is by owning a diversified portfolio that fits your time horizon and risk tolerance. So how do we do that? We do that by working with a financial advisor that can give us the wisdom, give us the experience, give us the educational academic background to help us make the choices that are best for us.
If you'd prefer to do it on your own, you don't want to work with a financial advisor, which many of my viewers fall into the camp, into that camp, do yourself a favor. Don't use Excel. Don't use Google Sheets. Too easy to make a mistake. Use a tool that's designed to help you build a good, solid, correct plan. The tool that I like is called Bolden. You can sign up for it at this link here. I like Balden for three reasons. It's powerful, it's easy to use, and it's affordable. There's no reason not to use a tool like Balden. Uh I am an affiliate, so if you use this link here, um you'll be supporting the channel and you will get a two week free trial of the full Balden package.
Okay, so we we learned about the history of the stock market and stock market crashes. Now I want to tell you about my favorite tool for buffering out volatility. You know, many advisers would say that's why we have bonds in our portfolio to buffer out the stock market volatility. But you know what? Sometimes that doesn't work. In 2022, we saw both stocks and bonds go down. And retirees that had traditional retirement portfolios of 50/50 or 60/40, they still felt a lot of pain because both their bonds and their stocks were down.
So, my favorite tool to buffer out volatility is time. And I want to share this chart with you by the Capital Group. And this looks at one-year time horizons in the stock market, the first buy chart. And what it shows there is in the 91 one-year time periods that they looked at, 61% of the 61 times out of 91 times the market was positive and 30 times the market was negative. Next, if we look at three-year periods, you can see in uh what is this? 89 three-year periods, 78 of them were positive and 11 of them were negative. And then as we go further, as we have more time, if you go out five years, you can see out of the 87 periods looking back. Now, we have fewer of these because there's fewer rolling periods the longer the period gets. So, at five years, you can see there were 87 u 5-year periods that they evaluated. 81 of those were positive and six were negative. But look what happens at 10 years. In 10-year periods, doing these these rolling 10-year periods going back 82 years, what they found was they were all positive. So time can be a very powerful tool to allow you to take more risk in your portfolio.
The challenge is as we get older, we have less and less time and we also don't have new money coming in which can make the down cycles in the stock market even scarier. The next thing is just the risk of timing the market. This is uh also uh from the capital group and you can see this is $10,000 invested in the S&P 500 from January 1st, 2005 to the end of 2024. And if an investor had simply owned the S&P 500 over that 20-year period, their $10,000 would have grown to over $60,000. But if they missed just the 10 best days, their $10,000 would have grown to about $25,000 instead of 60 or $65,000. And if they miss just the uh best 20 days over a 20-year period, so that's one day per year on average, their $10,000 basically stayed flat. So understanding that time can help us in two ways. This time in the market will help us and secondly uh it will also buffer out that volatility.
Now, one of the reasons that as we get older, we we have less exposure to stocks is we don't have as much time to wait for the market to catch up and we're using that money. So, the the money is not staying in the account. We need the money to live off of. Okay.
Next, I'm going to uh share with you an article uh about by Invesco about the long-term and how long we need to wait for the market to recover. So, it's one thing for the market to go down and come back very quickly like it did during co. It's another thing if we have to wait three, four or five years.
Before we get to the Invesco article, I've got I've got a request and that is if you enjoy my videos, give them a like. If you've enjoyed several of my videos, give me a subscribe. My clients used to pay thousands of dollars for my insights and I give it away all for free. Now, all I ask is for for a thumb for a like or a sub for if you loved my video. So, think about subscribing or liking this video. Thank you.
Okay, Invesco. Now, we're going to um go to an article that's going to help us understand how long the market typically stays down. And this Invesco article is called what investors need to know about stock stock market corrections. Um and they've got four four points that they make. The first is in general recoveries have been quick. Not all of them, but they say the average time to recover is 3 to five is 3 months from a 5 to 10 uh% downturn and 8 months from a 10 to 20% correction.
Now, part of the challenge is if the stock market drops, let's just give me easy math, 40%, you know, let's say it went from 100 to uh 60, which is a 40% drop. Now it needs to gain like 55% to go from 60 back up. So we we do have the math isn't equal on the way down as it is on the way up. So you have to make a bigger gain. Um so that should give you some comfort knowing that in general stock market corrections are are relatively quick. Not always though and that's important to realize that.
The next one is that markets don't die of old age. There's typically a shock to the system. The market usually doesn't stop going up because it's kept going up. There's usually some shock to the system that that pops that bubble, for lack of a better term. And none of us know what that pop is going to be that's going to cause it. Uh the Invesco article also says it's typically better to add to our portfolios if we still have new money coming in after severe down days, after the really scary days. And timing the market has generally been been better than timing the market. Okay.
So, we're going to get to the the one chart that I've shared with my clients that gives them solace, gives them peace of mind, but I want to share one last thing because I think it's really important. and that is what do we do when the scary day comes and and how do we get through it? I've got just a couple things I want to share with you.
One is I think it's important to stay diversified. You know, when you pick individual stocks, which is fine as long as you're diversified, but you're looking for the needles in the haystack, you're looking for the winners. And for many of us, just simply owning the whole hay stack, then we get those needles in the haystack and we get all the winners. in the last couple years has shown us this with the S&P 500. People own the hay stack, but they've also gotten these supercalers that have have benefit from the AI uh period that we find ourselves in right now.
The next one is job number one, I think, is getting your asset allocation correct. If we get that, we'll be able to sleep at night during the the scary periods of time. Um and and we'll also be able to navigate and we'll be able to stay in the course. And remember, our risk tolerance once we retire is likely going to be quite a bit higher than it is right now if you haven't retired yet. So, just be aware of that. I've seen that bite people and I don't want it to happen to you. Maybe they were 80% in the stock market before they retired, but once they retired, that felt much different than it did when they had new money coming in that they could add to the stock market if it went down. Once you retire, you're taking money out of the stock market. So, many of us have heard of the term um what is it? Uh dollar cost averaging, DCA. And that is, you know, if you if you're putting in a $100 a month to the stock market each and every month as the market goes down, you will benefit from that over time. But the evil cousin of dollar cost averaging is sequenced return risk, which is what retirees are doing. They're taking money out as as the market's going down. So So that's the evil cousin uh to the dollar cost averaging. So just be careful.
So the the next one is just having realistic expectations for what your returns are. I have had people come visit me for the first time and say hey I only need to get a 15% return a year in order to hit my goals. I don't want to be aggressive and you know shooting for a 15% return is very aggressive. So how do you know how realistic your goals are, how your plans are? You know the first way is to hire a pro. And again, the second way if you want to do it yourself is to use the tool designed to help you do it. Again, the tool I like is called Bolden. You can sign up for it at the link here. It's powerful, easy to use, and affordable.
Okay, now on on to the main show, which is this chart that I promise again, in over 20 years as a financial advisor, I've never seen one chart have such a powerful impact on people and put things in perspective. So, I'm really happy to share it with you. This chart is by Vanguard. It's from their article to do uh called what to do when markets drop. And again, we're seeing this chart here. This goes back to 1980. Um showing the market up and down in the crashes. And of course, we all want to stay out of the crashes. But let me show you this same chart in a different way or Vanguard put it in a different way. And this is the the blue. The teal is when the market goes up and the brown is when the market's going down. Both in breath and in amplitude. And when you look at it it this way, you know, those those brown uh those brown places, those brown areas in the chart don't look so scary. And it looks like it'll be much easier for us to navigate scary periods of time. And keep this in mind during scary periods of time. And also keep in mind when do you want to retire? Because unfortunately the youth of her senior years passes much too quickly. And that's why I made this video here. Why waiting to 65 to retire might be a big mistake. Thanks for watching this video. Bye-bye.