Podcast: Is the Reward Worth the Risk?

Roger: Every day the market goes up is a day closer to the market going down. And every day the market goes down, is a day closer to the market going up. And I know that sounds kind of silly, but it’s so true. And I talk to people for over 30 years on these topics. And it’s incredible how people talk themselves into certain things.

Clark: You’re listening to Retire Happy with Roger Gaynor, President of Gainer Financial and Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. Are stock market investments worth the risk right now? There are quite a few market metrics and indicators that play a role in uncertain times.

And on today’s episode, we’re talking about some of these need-to-know activities that have been impacting the market for years and what that may mean for your future investments. For more content like this, head on over to gaynorfinancial.com. Now, let’s jump in.

All right, Roger. Welcome back. Today’s topic, it’s related to risk. This has been a topic we’ve discussed in the past on a variety of perspectives. But there’s just been a lot of things I’ve been seeing happening that certainly want to bring up to you. As always, welcome back and thank you for taking the time to share with us your perspectives in all this.

Roger: It’s my pleasure. I really enjoy these conversations. And I’m hoping our listeners get something out of it that will help them move themselves towards their life and financial goals.

Clark: So I was reading your blog and this is one of the blog posts on risk. And I just had some questions. And being the kind of layman and I’m learning a lot of this as we go, maybe these are some questions other folks are thinking about. So we might need some help with the language here but I just saw on the news how it seems like right now we’re in a time…like the longest run without having a recession. Is that the right language I’m using?

Roger: Well, it is the longest run in post-war history without a 20% plus correction in the stock market. We did have a very brief pullback that was almost to 20% last December. But it wasn’t down long enough for that to really count. So yes, we’ve had a very long, wonderful expansion in valuations in the stock market.

There’s been tremendous rallies and a lot of people today are believing that the good times will last forever. I read a lot of chat room stuff and financial topics from time to time. And you read the commentary now and people are just getting a little more comfortable than I think is appropriate, given all the underlying moments that are screaming, “The risk is high. The risk is high.”

Clark: Right. And I’ve heard you say in the past, something along the lines of what’s happening in front of you that ideal, you know…

Roger: Well, it’s human nature, you know. And when the stock market is rallying and we set a new high, inevitably somebody publishes an article, “Dow Jones is going to 40,000.” You know, “Tthis time, it’s different, we’re going to go up forever,” and everybody gets all excited. And then if you might remember, 10 years ago…it’s hard to remember a lot of that stuff. But in 2008, all the articles were, “The Dow is going down to 1000. Oh my god, it’s never going to stop, the bleeding will always go on.”

And the reality is, and I hope our listeners can take this to heart, every day the market goes up is a day closer to the market going down. And every day the market goes down, is a day closer to the market going up. And I know that sounds kind of silly, but it’s so true. And I talked to people for over 30 years on these topics. And it’s incredible how people talk themselves into certain things, “Oh, I don’t want to sell. I don’t want to take profits, because it’s going to go up more.” And it’s one of the reasons I stopped being a stock broker by the way, because, you know, I’d call clients and say, “Hey, take profits.” And they’d say, “Oh, no, it’s going up more.”

And then of course, the market would turn and they would lose money. And they’d say, “Why didn’t you make me sell?” You know, how do I make somebody sell? Take a cattle prod? “Sell darn it. Sell.” You know, and it’s just funny. When I was first in the industry, as a broker, one of the first sayings I learned was, you can never lose money by taking a profit. And there’s a lot of people right now that are in significant profits based on the run up over the last 10, 11 years. Well, actually we’re in the 11th now. And it’s like Kenny Rogers used to say, “Know when to hold them and know when to fold them.”

The object, as we’ve talked on a few previous broadcasts, it’s more important to not lose money because there are times when it’s very easy to make money. In 2010, it was pretty easy to make money in stocks coming off the bottom. There was tremendous upside. Well, today, you have to ask yourself, how much more upside can we get out of this market on our investments? You know, if you look at what we’ve done over the last year, if if we don’t pull through, plow through the current levels significantly on the S&P 500.

We really have to get up to about 3000 with some conviction, which means good volume, broad participation, lots of stocks, hitting new highs. These are the things we’re not seeing now. For us to really make the level we’re at right now, a floor instead of a ceiling. So we’ve kind of hit this level about three times so far this year. If you were a charting or technical analyst, you call it a triple top. So a triple top is either a very solid floor, then it becomes a triple bottom, or a really tough ceiling to get through.

So unless we break through this level with conviction, stay over it for a couple of weeks with nice volume and broad participation, I’m afraid that we might have seen the highs for the year already. That’s not to say the markets going to drop in half in the next month, I want to calm everybody down on that. Since my blog post came out a little while ago, and it’s posted on our website if you want to read it, I’ve been getting a lot of calls. And my purpose was to get people’s attention because there’s just a lot of folks who just, they’re not worried, they’re not concerned. But if you’re within five years of wanting to retire, and frankly, if you’re trying to build for retirement, not losing money is a really, really important job.

Clark: It’s a good point. And all of this is at gaynorfinancial.com. Of course, I want to make sure we plug that. It’s a lot of content there. But it’s a good point and especially on the Retire Happy podcast. It’s always been…the end game is, how do you protect yourself the best way you can, be as smart as possible, especially in that last ramp of…is the benefit. What I’m also hearing from you is, in this whole concept of with the risks, how much higher can it go right now? Is it worth trading what you could potentially lose significantly? Which a lot of this, understand is kind of hard to predict. Of course, no one can predict anything. But in the sense of maybe being in this point where you have several, a couple years, where you’re trying to protect your investment, what are some options? How do you navigate these waters, where there’s so much unknown, especially when you’re just trying to protect and maybe walk away at the right time?

Roger: Well, the best protection is cash. And many of our clients, we’ve been encouraging them to raise cash over the last couple of years. Because there’s going to be tremendous opportunities on these pullbacks. Like I said before, think of the market kind of like getting on the highway. And here in California, sometimes the highway is very jammed and you just can’t move anywhere. There’s just nowhere to go. And other times it’s smooth sailing and everybody’s flying along at 75 miles an hour.

This is kind of like a traffic jam. Right? You can’t floor it when you’re in bumper to bumper traffic. It just doesn’t work. So if you think of it that way, you got to slow down, you got to take your foot off the gas, and you got to be aware of where the brakes are. And so, if you look at what the professional money managers are doing over the last few months, and really the first half of this year, there’s been a tremendous rotation into more conservative stocks. Then my blog post, I mentioned that tech stocks have only been up about 5%, 6% this year so far as of where we’re talking now.

But things like utility stocks have been up over 15%. What we call consumer non-durables, think soap, detergent, deodorant, things that we consume that don’t last forever, that’s the consumer non-durable. So these are companies like Procter and Gamble. And they’ve been rallying almost like they were tech stocks. They’re up almost 20% year-to-date. And that’s pretty amazing for some old stave boring types of stocks. But we’re seeing that rotation away from the so called Fang stocks, which have been very, very stylish in the last three years…

Clark: And FANG is an acronym. Can you just recap that really quick?

Roger: Yes. Facebook, Apple, Amazon, Netflix, and Google, those are the FANG stocks. And they’ve gone up a ridiculous amount. But this is what I mean by participation. The indexes have been going up based on, to a large extent, those five stocks, because that’s how the Dow Jones Industrial Average, the Standard and Poor’s 500 index, and the NASDAQ, that’s how these work. They’re what they call price-weighted. So these are the biggest stocks, they have the most influence over the actual index itself.

And you can make an argument that there’s quite a few people out there that, you know, are looking at pretty significant profits in those stocks. And thinking, “I just don’t want to give all that back”. So I’m thinking I’m getting a little more nervous, it’s not really going up that much more like it was. In fact, I have a client of mine who’s bragged for years that he bought Apple for $5 a share. He’s ready to dump it all because he’s just getting…he said, “If I gave all this back, everything that I’ve done and everything that I’ve made in this stock, it would really be very, very upsetting to me.”

And you look Apple’s significantly off its high, it’s all time high was in the $233 range. And today it’s trading around $200. You know, that’s like almost a 15% drop. It’s about a 13% drop for you mathematicians listening. But again, it’s people taking profits. And then there’s the crowd that says, “Oh, wow, I just want to buy more and more of Apple, because I just love Apple.” And, you know, it might get higher eventually.But I’d say that the easiest way for you to figure out what to do is to know what the money is for? What’s the purpose? Is this money going to help me with the down payment on a house? Is this money going to send my kids to college? Is this money going to fund my retirement? And when you understand the mathematics of loss. Okay? So if you drop 50%, if your valuations dropped 50%, how much do you have to earn to get back to zero, to get back to even? You got to earn 100%. If I lose 20%, I got to make 35% to get back to 0, to get back to even. Does that makes sense?

Clark: Right.

Roger: So instead of spending your time watching things grow, you’re spending your time trying to recover from losses. And time is the one asset you can’t get back. We’ve kind of talked about that before. So this is a time I would recommend our listeners, sit down with your financial advisors. And if you don’t have one, please contact me through www.gaynorfinancial.com, and I’m happy to help you. But sit down and ask them, what’s the plan to protect my assets? Because it’s funny. I’m really kind of shocked but I’m hearing from lots of folks that when they make that call, they just get a shrug, we just manage money and we manage for growth and that’s the way it is. And maybe that’s fine when you’re in your 30s or 40s. And maybe you’re comfortable, you know, having the market drop and taking five years to get back to even. Maybe that’s okay for you, but regardless, you need to understand what the people you’re working with, what are they doing and does it serve your vision? I’d say that that’s the most critical aspect of this.

Are your assets doing what you want them to do? Investing to grow my money for no particular purpose, generally doesn’t work out all that well, I suppose unless you’ve got the game rigged like a investment banker or a high frequency trader or somebody like that. But I would make an argument that those folks really aren’t taking on much risk at all, when you look at what they’re doing with the money. You were asking me earlier about risk. The bond market is really considered a bellwether for economic risk in the country.

So we’ve talked about this before, many people believe that the Federal Reserve sets interest rates. No, they don’t. They set two interest rates and it influences the market, but the market sets all the rest of the interest rates. So treasury bonds, corporate bonds, mortgages, all that set by the market. The only two interest rates that are set by the Federal Reserve are the discount rate and the Fed funds rate. Fed Funds is what banks lend money to each other. And the discount rate is the rate a bank pays when it borrows from the Federal Reserve. You and I can’t access either one of those. You know, we’re not a bank.

But if the marketplace is running for shelter, like we’ve seen recently, the place that they’re generally running is into the 10-year bond that’s kind of become the bellwether. And as of today, we’re right around 2% on the 10-year bond. And if you look at a six-month treasury bill, that’s it about just under 2.1. Now stop and think about that. I get a higher interest rate tying my money up for six months than I do for tying my money up for 10 years. And it’s even more radical, the five-year is it about 1.79.

So I tie my money up for five years and I get less than tying it up for six months or a year. Now what we call that is an inverted yield curve. And if anybody wants to know more about this, I have reports and different stuff we can share. But an inverted yield curve, we’ve been inverted now for more than six months. And it’s generally considered a precursor that the bond market is telling us to expect a recession in the not too distant future.

Now generally, when the yield curve inverts like this, it’s somewhere between 6 and 18 months before an actual recession begins. So we’re not exactly there but we’re starting to see a lot of things soften, real estate prices. You know, here in Northern California, we’ve had this ridiculously hot market, people read about it all over the country. Well, it’s cooling off. I mean, we’re not seeing valuations. In fact, headlines last week here were, “Prices dropped 1.8%.” I mean, that’s like, “Oh. You’re kidding me. Prices are never supposed to drop in residential real estate.” It’s kind of, that’s sort of arrogance we’ve been talking about. Feeling like, you know, it doesn’t matter because it only goes up so I don’t have to make a good evaluation.

So this is one of the things that I’m watching that are kind of suggesting that the economy is slowing down. And if the economy is slowing down, one or two things has to happen to justify the level in the stock market. Either prices have to come back to kind of their equilibrium based on today’s profit trends or profits have to expand to justify the pricing. And if we don’t see the profits start to materialize, and we’re just now going to start seeing how the second quarter went, then prices will tend to adjust to their normal equilibrium and the relationship between profits and stock prices.

Clark: So…and we got a few minutes left, but part of what you’re doing with all your clients you work with, you have them start off filling out what we call a thought organizer, which helps them assess where they’re at, how they organize your thoughts on all these options, all these things happening. But I’m curious to ask you, what kinds of options does someone normally look at it if we’re hearing from a lot of people, including yourself that, “Hey, the things may be changing. We might not be experiencing what we have been in the future.” If you were to maybe pull money from the stock market, whether options are…I know, we’re not giving specific advice here. All this is…it depends probably, but what are some of the types of options that someone can be potentially exploring?

Roger: Okay. Well, one area that we’re using with clients that need a little bit higher yield, and are concerned about stock market valuations, we’re looking at very specific sectors within the world of real estate. What I would call recession resistant real estate. Things like medical office buildings, self-storage, where you can go get your locker and put your stuff, the extra stuff you have. We’re doing some things with mobile homes. Mobile homes are very interesting asset class and you can conservatively make some very nice returns. But you have to be careful, like with anything and understand the ins and outs of that type of an investment. And those investments that I just mentioned really aren’t for everyone. But in certain circumstances, they’re a little downside in these things and they can generate nice cash flow and give you an opportunity for appreciation. I don’t expect them to be home runs. You’re not going to make 30%, 40%, 50%, you know, over the next 12 months. But you are going to get nice, you know, in the 5%, 6%, 7% range in cash flows and a possibility of seeing appreciation in the underlying assets.

There are other strategies that we’re employing, where we use asset allocation type of indexes. These are managed indexes. And they work with asset classes, everything from commodities to emerging market bonds. They’re automatically reallocated. So because, the one thing we know is that money flows between asset classes, and it doesn’t necessarily stand still. It slows down and it speeds up. But these indexes are looking at where the money is flowing and trying to join that parade as it were. And some of them reallocate daily, and some reallocate monthly, and some reallocate semi-annually and some, annually. And it really depends, again, on time-frame and other features that you’re looking for. But these also have some element of downside protection. Some of the vehicles that we use to participate in these multi-asset indexes also have a separate mechanism that prevents you from participating when the markets go down. So you can only get zero and up instead of the full roller coaster ride.

So those are the kinds of things we’re looking at. And we’re also looking at conservative vehicles where you can stay very liquid and with your cash and still get that 3% to 5% range and still be able to access your capital and such.

So those are some of the things that we’re doing today with clients. They’re not extremely sexy, but they’re very effective. And sometimes it’s just more important to live to fight another day. 2008, I think I mentioned this on a previous podcast, was one of my most satisfying years because I come in, in the morning and they’d be thank you voice mails from my clients that weren’t losing money. And all their friends were getting beat up and losing sleep. And they were sleeping well at night and not losing money because it’s that clarity, it’s the process. It’s starting with the thought organizer. It’s knowing what it’s for instead of just trying to put blinders on and, “We’re just investing, we’re just investing, we’re just investing.” The strategies matter.

Clark: Roger, thank you, as always so much. AndI know with all this information, all these changes, what someone doesn’t need to do is run and panic. That’s obviously going to be not what you want.

Roger: No. Don’t just knee jerk and sell everything and go hide in the corner. The market’s giving us an opportunity in real estate, in stocks, to reposition and to reduce our risk exposure. You can either take advantage of the opportunities or deal with the fallout is what I would suggest.

Clark: Roger, thank you for taking the time. Enjoyed it. And looking forward to our next session here on the Retire Happy podcast.

Roger: Excellent. Great talking to you. Take care, Clark.

Clark: Roger L. Gaynor, RICP, CHFC California insurance license number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, Nevada, and Oregon. Roger L. Gaynor is an investment advisor representative, providing advisory services through HFIS Inc. a registered investment advisor. Again our Financial and Insurance Services Inc. is not owned by or affiliated with HFIS Inc. and operates independently.