The Importance of Not Losing Money

Lost Money

The following is a transcript of Episode #52 of the Retire Happy podcast with Roger Gainer.

All episodes of the podcast can be found at Apple PodcastsGoogle Podcast, and Spotify.

Roger: Now, most of our listeners probably know who Warren Buffett is. Warren Buffett is pretty widely quoted on his two rules of investing. Rule number one, don’t lose money. Rule number two, never forget rule number one.

Clark: You’re listening to “Retire Happy with Roger Gainer,” president of Gainer Financial & Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. With so much uncertainty in the world today, it’s more difficult than ever to make decisions that can help you progress toward your financial goals.

So in this episode, Roger reminds us uncertainty doesn’t mean you shouldn’t do anything. He shares how time can be an ally or an enemy and explains how Warren Buffett’s two rules of investing still stand strong today. There’s a lot to cover, so let’s dive right in. And don’t forget to head on over to gainerfinancial.com for more content like this. Enjoy the show.

Roger, welcome back. How are you doing?

Roger: Can’t complain. Nobody cares anyways.

Clark: Can’t complain. Oh, I do care. I do care how you’re doing.

Roger: Yeah. No, I’m just saying that there’s no use in complaining because we all got something, you know, our little sack of rocks to carry around. So yeah, you know, I’m doing very well.

Clark: All things considered.

Roger: All things…well, you always have to consider everything, right? That’s why we have this podcast.

Clark: That is a great transition to what we’re talking about today. There’s, of course, so many uncertain times, especially right now. You know, every few months, I feel like things are more and more unpredictable. But now though, as we’re starting to think about this is the new reality, what do we do? How does that affect retirement? How does that affect our planning?

And today, we’re talking about the importance of not losing money. So what does that actually mean in your own words? Of course, it seems obvious, but what does that mean?

Roger: Well, yes, it does feel…people say, well, of course, I don’t want to lose money, but nobody wants to lose money and we wanna make money on our investments and all of that stuff. But, you know, there are periods of time when that becomes harder and it feels like we’re in one of those periods of time right now. And we know these come along from time to time. You know, we’re seeing massive changes in the underlying economic landscape if you will.

You know, we’re seeing interest rates going up. We haven’t really had much of that in the last 40 years and we’re seeing inflation increasing, and we haven’t had much of that in the last 40 years. And we’re certainly seeing lots and lots of political and economic instability. A lot of things are changing right now. And, you know, there’s that saying you hear all the time if there’s an advertisement for a brokerage firm or an investment that past performance is no guarantee of future results.

And that really boils down to this notion of not losing money. You know, this is the fifth installment of a follow-up on a podcast that we did back in October of last year called, “How can you retire during uncertain times?” And we had five steps. So this is the fifth step.

Clark: And real quick for context, those first four, know your why, know your when, have an income plan, how will taxes affect my income? And this is what brings us to the fifth and final step, avoid losing money.

Roger: Right. Now, most of our listeners probably know who Warren Buffett is. Warren Buffett is pretty widely quoted on his two rules of investing. This is how important he sees this concept. Rule number one, don’t lose money. Rule number two, never forget rule number one. It seems obvious, but it’s the math that really bears this out, right?

When you wanna grow money, time is either your ally or it’s your enemy. And so the math tells us if you lose 10%, you gotta make 11% to get to even. If you lose 25%, you gotta gain 33% to get to even. If you lose 50%, you gotta make 100% to get back to even. So, you know, the most recent example back in 2007, we had almost a 60% drop in the S&P 500 and in 2008. The whole move started in ’07.

But to get to where we were before this down move occurred, it took five and a half years to get back to even. Well, think about it. If you were compounding, you’d have five years of compounding that you’d have lost out on, but if you were retired or about to retire, you don’t have that five years to wait for it to come back. Does that make sense?

Clark: Right. The concept of time being an ally or an enemy, I wonder how much that influences a theme you’ve often talked about, about if you don’t take action…uncertainty doesn’t mean you shouldn’t do anything is a common phrase you talk about. So that really plays a big role here, right?

Roger: Right. Well, right now, you know, when you see the backdrop changing so radically, you know that it’s gonna have an effect on how stocks, real estate, and other investments are going to perform in the future. So maybe you can’t figure out what the future will bring, but you can look around you at the risks to what is going on right now and at least protect yourself. And we’ve talked about a number of different techniques over the years and how to protect yourself from the downside.

You know, one of the most underappreciated methods for protecting yourself is called cash. You know, cash is the thing that you ultimately can spend, and sometimes it’s just a better deal to make nothing than it is to lose money. I mean, it’s almost always a better deal to do that.

Clark: Wow. The stuff you talk about, Roger, sometimes it seems like, wow, that almost feels too obvious. Well, like the simple things is what really matters is what I think you often share.

Roger: Yeah. We tend to make this more complicated than it needs to.

Clark: Why do you think people do? It’s with money, money is emotional.

Roger: And Wall Street has done a wonderful job of making this all seem very, very complicated. You know, that’s something I hear over and over again in good markets, bad markets, but over the decades, you know, people say, gosh, I saved all this money. I wanna retire, but I don’t know how to connect those dots. I don’t even know how I got here. Somebody told me to just put money in my retirement plan. I can’t tell you the number of clients who said, you know, I added up what I put into my retirement plan and almost everything that’s in there is what I contributed. There’ve been very little returns.

Clark: It’s almost like a savings account that gives you like 0.001 interest.

Roger: Well, exactly. So, you know, there’s a lot of what I would call unrealistic expectations. Here’s a report on my desk from a website called ThinkAdvisor, lots of research things there. It’s for financial advisors to do research. Academic work is there and some very interesting studies. And here’s a study from 2017 that shows that 96% of stocks don’t beat treasuries in the long term.

And I’ll just read you a little segment here. It says, “From 1926 through 2015, only 4% of listed stocks were responsible for the overall net gain in the United States stock market.” The other 96% collectively matched 1 month T-bills over their lifetimes. Now, when people invest in the stock market, they’re investing there because they wanna beat one month T-bills. They wanna be 10-year treasury bonds, all right? They wanna get a better rate of return than inflation. And we all want that, of course. But it’s not realistic.

You know, right now, I’ve got clients, and we’ve talked about this before, with a lot of highly appreciated tech stocks. And many of these stocks, you know, are down 20% since last November, 30%, 50%. And yet these folks are hanging on because, “But it was that much higher. When it gets back there, that’s when I’ll sell.” And you have to ask yourself, would you buy this today? And if you wouldn’t buy it today, then you should get rid of it because the world has changed.

You know, we’ve seen that with a lot of the high-flying stocks from the height of the pandemic, you know, they’ve come back to earth. So you gotta take stock periodically of your stocks. You gotta take stock of your real estate. We’re seeing, you know, crazy high prices in certain segments of the real estate world. Well, you gotta ask yourself, is that sustainable? Is it time to take profits?

I see a lot of selling going on in segments of the real estate world. And again, interest rates are going up and you don’t wanna lose money. So if you can start from there and understand the impact. I have a spreadsheet here that I’m happy to share with any of our listeners.

Clark: Like an Excel sheet, kind of like a math calculation?

Roger: It’s an active calculating spreadsheet. And we’ve loaded in the last 21 years, so from 2000 through 2021, returns for the S&P 500. And we have the ability to plug in, you know, a withdrawal rate, and so…because we wanna create income off of this. And it’s just what we call the sequence of return risk. And what we find is if we’re gonna pull 5% off of that, if we’d have started doing that in 2000…because I retired in 2000 and I’m gonna take 5%.

And, of course, I want my income to stay the same every year. I certainly don’t want it to go down. And if you’d have done that, and say you had $250,000 portfolio and pulled 5% off, that’s $12,500 per year, you’d have run out of money after the 16th year, just based on the sequence of returns.

Now we have a randomizer button on this spreadsheet and we can change the sequence of returns. And you’ll see sometimes there’s hundreds of thousands of dollars left and sometimes you just run out of money sooner than you ever anticipated. And it’s because of that random, you know, I don’t know, this year I make 28%, next year I lose 12%. You just don’t know when that stuff is gonna happen. So this is why you need some downside protection.

On this spreadsheet, we have the ability to compare it to a portfolio where you get some percentage of the S&P 500 to the upside, but 0% on the downside. Now, at 50% of the upside and 0% of the downside, there’s not one scenario where you run out of money. In fact, there’s not one scenario where you don’t beat the overall S&P 500 returns regardless of how you randomize them.

Clark: What? How?

Roger: Yep. No downside and half the upside. We can drop that all the way down to 40%, and about 85% of the time, no downside and 40% of the upside of the index is going to beat an index fund.

Clark: And I know this is a whole another deeper conversation probably, but at a high level, how does that work? I mean, that sounds…

Roger: It’s the math I was just doing.

Clark: It’s just that? It’s just the math? There’s nothing fancy or…

Roger: No, it’s just pretty straightforward math. You know, it’s one thing if I’m not taking money from that portfolio, if I’m paying my bills from a paycheck, but remember, we’re drawing money off this portfolio every year to live, to pay our bills, to put food in the fridge. I mean, it’s why we saved all that money, right?

Clark: Right.

Roger: So there’s a wonderful website you’ve probably heard of, Wikipedia. You know, lots of interesting data and information in Wikipedia. Well, there’s something called Investopedia, which is dedicated to things financial investing, retirement, all kinds of stuff in there. And this is a report I pulled off. You know, you’ve heard a million times, you have to stay invested because if you missed the best days, your performance drops dramatically.

So this particular paper shows in the last 87 years, and this was back in 2015, I should probably get the updated one of these, if you’d had just stayed invested from 1927 to 2014, your dollar invested in the S&P 500 would’ve grown to $116.59. That’s an 11,558% return. That’s phenomenal. If you missed the 10 best days, that drops to $38.67.

So that’s pretty impressive, right? Instead of making 11,000-plus percent, you’re only making 3,767%. So about a third of the performance that if I’d have stayed invested. But what we really don’t hear about is what if you missed the 10 worst days. If you missed the 10 worst days at the same time period, you’d end up with $365.69 for a 36,468% increase. In other words, over 3 times better return if you missed the 10 worst days.

And if you missed both the 10 best and the 10 worst, your performance would go up. Instead of $116 from a dollar, you get $121 from a dollar.

Clark: So what do you think someone should do with this information as it relates to planning to retire happy?

Roger: Well, I think, for one, don’t dismiss strategies that don’t give you sexy returns in a year like last year. I had so many calls, you know, from people that said, well, you know, I had friends that made 20%, 25% last year. Well, the S&P 500 did over 25% last year.

But if you’re to look at what the S&P 500 has done over the last 12 months as of today, over the last 12 months, it’s done 13.71%. Now remember, in the calendar year, last year, it did a little better than 27%. So what does that tell you? The losses from the beginning of this year have dramatically reduced the rolling past 12 months’ returns.

Clark: It just seems kind of unheard of how something can, over such a long period of time, still stay consistent. And, of course, things get overcomplicated because there’s a lot of money to be made and there’s a lot of, I’m sure, confusion out there, and, “Just trust in me and I’ll make sure you’re okay. Trust in this product. I’ll make sure it’s…” How do you respond to that?

Roger: Well, yeah. That’s been one of my main complaints over the years in this industry why I left the brokerage world. Wall Street has convinced a lot of people of a lot of things that aren’t necessarily a lie, but they’re not the full truth. Let’s put it that way. You know, like you hear, oh, the market’s averaged 10% returns over the last century. You hear that all the time, right?

Clark: Absolutely.

Roger: Okay. All right. Well, if you go back to when the Dow Jones was first published in 1896 and to today, the compound return of the Dow Jones, which is our oldest index, is right around 5%, not 10%, about 5%. But that’s because they always talk about the average rate of return. So they’re mathematically correct, but the average rate of return doesn’t buy a dime worth of goods. That’s just an average rate of return, not a real rate of return. So here’s the average, you buy a stock for $100 and it goes to $200. What’s your percentage rate of return?

Clark: That’s not good, $5 [crosstalk 00:18:59]…

Roger: No, if I buy at $100 and it goes to $200, I made 100%. I doubled my money.

Clark: Oh, of course, yeah, 100%. I bet you’re right.

Roger: I made 100%. Well, what if it goes from $200 back to $100 the following year? What is my percentage of loss?

Clark: Well, if it goes down $200 down to $100?

Roger: Fifty percent, yeah. We lost half, right?

Clark: Interesting.

Roger: So that’s a 50% loss. We started at $100, we ended at $100, we made zero return, right?

Clark: Right.

Roger: But we had a 100% up year, a 50% down year, that means our average rate of return was 25%.

Clark: Wow. That is not okay.

Roger: Well, it’s mathemagic is what I call it.

Clark: Well, it’s that quote also from Mark Twain, there are three kinds of lies, lies, damned lies, and statistics.

Roger: There you go.

Clark: So it’s a really interesting point. So all this to be said, this stuff does not have to be complicated, but there’s a lot of noise. There’s a lot of confusion out there. So this is a good transition to start talking a little bit about the Thought Organizer and the work that you do and helping someone navigate these waters.

Roger: Well, you know, there are definitely some ways to protect yourself. One of the first considerations is how old are you? How much time do you have left? Do you have other assets? You know, it’s one thing if I have a volatile portfolio if I got a bunch of cash counterbalancing that volatility. But if everything’s in the stocks or something like that and it goes down and I don’t have, you know, that big cash position, that big safety position, you know, that can be disastrous.

How’s your health? I mean, how long are you likely to live and to need to live off of this money? So, with those as a background, you need to have a plan. You know, people make investments in stocks, property, other assets, and the value goes up. And when I ask them, “Well, gee, what’s this money for?” They don’t know. They’re just proud that they made an investment that went way up. And then when it’s time to turn that into income, they go, “Well, I don’t wanna sell it and pay taxes,” or, “Gee, it’s gonna go up more,” or, “I’m waiting for it to recover like we talked about, and then I will sell after it recovers to the price I could have sold at before.”

Now, we all know that when it gets back to that price, you’re still gonna think it’s going higher and you’re not gonna sell if it ever gets back to that price. So the other thing is, what is your sell strategy? I ask people all the time, when are you gonna sell it? And, you know, it’s easy to buy. Wall Street will always tell you how to buy and when to buy and where to buy. And like, one of my managers, when I was a broker, said, “Today’s a buying opportunity.” And I said, “Well, you know, this price is a little too high for where the entry point.” “Oh no, no, no, you’ve got a buying opportunity today.” And I said, “Well, in what market? I’m following all these different markets.” I was a commodity trader in those days. And he said, “Well, the market’s open. It’s a buying opportunity.”

Clark: Always a buying opportunity. You can always buy.

Roger: Right. You’re right. Well, every time you buy, somebody gets paid, right? So, it’s really important to understand that no matter how impressive a year is, you know, you get that year-end statement from Fidelity or Schwab and you look and you go, “Wow, my portfolio went up 20% last year,” and you feel really good about that, but unless you locked in that gain, you didn’t make that. Your portfolio appreciated by that bunch, but you didn’t make it until you sell it.

And we’re seeing a lot of that right now where people have given back a bunch of those gains. Year to date, we’re seeing a lot of investments, you know, bond, mutual funds are down an average of 11% since last November. That’s a big loss for something that you bought for safety. You need to know what you want from what you bought. When am I gonna sell?

Clark: And this is all the kind of stuff you’re asking. This is all the kinds of prompts in the Thought Organizer and working with you just mapping that out. If you’re gonna start, you need to think about when you’re gonna stop. When you begin, you gotta think about when you’re gonna end because that’s all about life. You know, we’re not here forever.

Roger: Well, you know, it’s purpose. We started the first of these five knowing your why. And so having a plan and a sell strategy and keeping perspective. You know, we always believe… There’s something called immediacy bias. Are you familiar with that?

Clark: No, what’s that?

Roger: Immediacy bias is our tendency to believe whatever’s happening right now is gonna continue to happen. Some people call it behavioral economics because we act and react to things. And our perception is, even though we know, using the market for an example, we know that eventually there’s gonna be a correction. It’s always been that way. Eventually, there’ll be a recession, but we get so excited about, you know, things being good.

And then when things are bad, if you can put your mind back to 2008, the headlines were, you know, the Dow Jones is going to a 1,000, it’s over, our economy is finished. It’ll never recover. Oh my God, it’s terrible. All these horrible things. And, of course, that wasn’t true either. So we just tend to believe that whatever extreme…you know, last year, I was seeing all of these articles being resurrected that the Dow Jones was gonna go to 100,000 because it felt that way.

And it was easy, you know, for people to say, “Yeah, yeah, this thing’s gonna keep going.” We’ve had 13 almost uninterrupted years without a 20% correction. And you get real used to seeing it just go up, but it doesn’t. And so you gotta keep that in mind. And once you know your why, that can help you create perspective. And when you know what that money is for and you know what the purpose of those investments are, then your decision-making is clear. And that is certainly where the Thought Organizer comes to play.

Clark: Well, that Thought Organizer is available on your website. It’s easy to fill out and I know your team is there to help. So, Roger, with all that being said, thank you. So great to always connect with you, to hear your Rogerisms, as I like to call them, and just hear the latest. So I really appreciate you taking the time.

Roger: All right. Well, you take good care.

Clark: Roger L. Gainer, RICP, ChFC, California Insurance License #0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative providing advisory services through HFIS, Inc., a registered investment advisor. Gainer Financial & Insurance Services, Inc. is not owned by or affiliated with HFIS Inc. and operates independently.

The contents herein are the opinion of the speaker and should not be considered as tax or legal advice. This podcast should not be considered a solicitation for investing or advisory services. Strategies mentioned are not a recommendation to implement or purchase those products or strategies. You should contact your own advisors as to the appropriateness for your specific situation.