Fix It Friday - The Three Most Important Numbers In Investing

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as emailed to me by a client.[: 00:00:30

And, uh, and then we'll go into the podcast 'cause I think it's very appropriate. So it starts off, it says, as a report goes, a local financial advisor, Rick Roses, announced that now is the time for utter panic and urged his [00:00:45] clients to hastily make huge money moves based on pure emotion. Rosa has called each of his clients one by one, advising them to let fear drive their financial decisions and recommending immediate changes.

Before taking time to [: 00:01:00

Hurry, he says. According to Rosa's, the stock market has never fallen 10% before, and it's probably a sign of the apocalypse. He says, this is unprecedented. When faced with [00:01:30] such uncertainty, the best course of action he tells them is to freak out and do something drastic. I'm encouraging all of my clients to abandon any semblance of a long-term strategy and to pull the trigger on whatever their emotions are telling them to do.

[: 00:01:45

Uh, so I thought that was a good segue into today's podcast.

ast with your host, Jonathan [: 00:02:30

And more to share fresh perspectives on making sound decisions that maximize your wealth. And now here's your host. [00:03:00]

%, uh, in the s and p [: 00:03:15

And I only say I'm happy to be broadcasting during that time because it's during those times when investors most need counseling to make sure that they maintain the proper temperament. Helping them to avoid making the [00:03:30] big mistakes that many make during these environments. So today I'm actually gonna talk about a couple of things that are related.

and, and the question that I [: 00:03:45

And so I'm gonna start off with, uh, with the question, what are some of the new portfolio moves? And I'm. Advising clients to make. And the answer to that is, my clients don't have any new portfolio moves to make. They [00:04:15] made their decisions, their portfolio decisions, all of them. When they decided that they needed to, uh, protect their money against inflation, when we set up their plan and they needed to protect their portfolio, uh, withdrawal needs from market [00:04:30] declines by having at least two to three years living expenses set aside.

made a long time ago when we [: 00:04:45

We still [00:05:00] need. To have the investments in the portfolio to protect us against the biggest threats. So let me address what the biggest threats are. We visited this in some previous podcasts, but it's certainly important to go over again when we talk about wealth management and wealth [00:05:15] preservation. I. What is it that, what is it?

who wanna retire, can retire [: 00:05:30

And so. Now I'm gonna tie in what I referred to in the beginning as the three most [00:05:45] important numbers in wealth management investing, and those numbers are 10, six and three. I. 10 refers to the last roughly 100 year annual average return for stocks as, as evidenced by the Standard [00:06:00] Poors 500 Index. So they've made 10% a year for the last roughly a hundred years.

ar types of companies. I say [: 00:06:15

Versus the 10% a year for stocks. And so [00:06:30] that explains the 10 number and the six number. The three number is inflation. That's been the, uh, rough inflation rate on average for the last a hundred years. So a return that we, uh, will get in investing is meaningless to us unless we know what the inflation [00:06:45] rate has been.

% a [: 00:07:00

Fully two and a half times or so more than bonds is what stocks made. And, and [00:07:15] so why is that important? If we're going to survive a period, like from the time I was born where it cost literally 10 times more today to buy, uh, what a, what a basket of goods cost back then. So if it cost me a hundred thousand to buy [00:07:30] something beginning decade, I was born in 1960, a hundred thousand today, it would cost me a million.

times higher, so a [: 00:07:45

External threat, which is inflation. I call the disease of money. We need simply to have a lot more sevens in the portfolio over the next multi-decade period of our lives than [00:08:15] threes. It's just that simple. The threes wouldn't have helped us keep up with inflation at all. In fact, bonds freeze every dollar that we invest.

undred thousand dollars in in: 1960

Whether we're experiencing, uh, an economic downturn for [00:09:00] whatever reason because of tariffs or anything else, or because of the pandemic. In 2020. Um, by the way, there's a parallel there. A lot of people today, they like to latch on investors to this term unprecedented. This is different this time, Jonathan.

'cause it's [: 00:09:15

So the, the self [00:09:45] inducement doesn't have any relevance. To the fact that as an investor, we still, for the next multi-decade period, need the sevens to be compounding at that rate after inflation versus the threes. It, the environment doesn't change that need, and that's [00:10:00] critical for everyone who's listening to that to understand and embrace the things that we're attracted to.

e. The dust settles and I'll [: 00:10:15

Having been much better off never having pressed the sell button, even though [00:10:30] it's an instant relief because. What we learned about investing in stocks, the ride up over long periods of time. It's like riding, uh, the stairs, right? Taking the stairs and the down, like we just experienced is like taking the elevator, uh, never [00:10:45] feels good.

tect their wealth, there are [: 00:11:00

Um, so whether or not we are 70 [00:11:15] years old, uh, or 35 years old. We have to embrace the idea that the average time it takes from the stock market to hit a peak level. So this February, the s and p hit something like 6,200, and then to go back to a trough level, [00:11:30] let's say the average bear market is down 33%, so somewhere in the 4,000 range might be a trough.

storically. So as long as we [: 00:11:45

Pile of money that hasn't moved or fluctuated. It prevents us from having to sell our stocks while they're temporarily down in order to support our standard of living. What it also allows us to do, having that two to three years living [00:12:15] expenses set aside, is to have the bulk of our money compounding in stocks at the 7%.

dollars and they're spending [: 00:12:30

And it also wouldn't hinder your compounding of stocks because you wouldn't have to sell them now at all. You would switch your spending to that cash piece. Uh, so, so being prepared financially is important. Being prepared emotionally is also [00:13:00] important. To put everything in context, we have, uh, a 15% average annual decline in the standard of Poors 500 every year since 1980.

than average occurrence, um, [: 00:13:15

Uh, and we've certainly had times where it's been much worse, but the focus always needs to stay on. It's okay. To be afraid and concerned about what's happening to our money [00:13:45] in the short term to the economy and so forth. But it's also critical not to reflect those concerns by changing our portfolio strategy and going to things like cash, too much gold bonds, because most likely we [00:14:00] will never get back into the market in time and, and those are just short term fixes that often interfere with and sometimes destroy.

how old someone is in their [: 00:14:15

So it's not the same for me. So I take a step back 'cause I am empathetic to how they feel about their age and their time to recover. But what I say to them is, let me ask you a question. If it has taken historically 40 months to go [00:14:45] from a peak in the stock market to a trough. Back to a new high, is that average time that it's taken historically different for someone who's investing when they're 35 or 70?

is no. It takes. Three years [: 00:15:00

And it's more important than ever [00:15:15] because someone today, uh, a couple in their seventies who doesn't smoke, is likely to live well into their nineties. So they have a pretty long time horizon. The inflation compound disease of money is very real for them, as it is for, uh, for [00:15:30] everyone else who's, who's in their thirties and, and forties and so forth.

ey're feeling. But to please [: 00:15:45

Financially, it just means they didn't plan properly, most likely, and they don't have two to three years living expenses set [00:16:00] aside. And that's, that's something that is hard to address after the fact. But in recovery, that's what those people should do. They should adopt the plan and be prepared next time.

ing. You can tune in always, [: 00:16:15

Voiceover: Thank you for tuning into another episode [00:16:30] of The Crazy Wealthy Podcast. For more insights, resources, and to sign up for our newsletter, visit crazy wealthy podcast.com. Until then, stay crazy wealthy.[00:16:45]

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