Fix It Friday - The Myth of The Risk of Stocks

Disclaimer: [: 00:00:00

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www. fusionfamilywealth. com.

Whether you're just starting [: 00:00:30

to share fresh perspectives on making sound decisions that maximize your wealth. And now here's your host. Welcome to another [00:01:00] episode of Fusion Vixit Friday. Part of the Crazy Wealthy podcast series. And today I'm going to talk about, uh, what I call the myth of the risk of stocks. And I, I call it a myth because, um, one of the [00:01:15] greatest fears that I found as a financial advisor meeting with, uh, Uh, investors for the last, uh, over three decades, is their biggest concern tends to be that, uh, as, as they retire, their, their, uh, [00:01:30] retirement, financially speaking, will be, uh, exposed to the risk.

rred to as the stock market. [: 00:01:45

Uh, but, but I call it a myth, the risk of stocks a myth [00:02:00] because As we sit here today on this podcast, a diversified portfolio of great companies. I'll use as an example, the Standard Fours 500, the s and p 500, which is an index of the, uh, uh, or, or, uh, a little basket of [00:02:15] the 500 best companies, best managed, most liquid, best financed, most profitable companies in America, in the world.

re at new high levels, and I [: 00:02:30

I say to them, well, what level was that at? Do you remember? And I can tell them it was at about 650. Today it's at 6, 100. So, uh, I asked them, it's, uh, How did you lose money [00:03:00] if it went down to 600 and today, uh, about 14 years later, it's, it's over 6, 000 and they kind of stop for a second and think, and the lesson there is that no one has ever lost money as an investor in the, in the S& P [00:03:15] 500 or a similarly diversified portfolio because the only declines that ever happened Uh, in that kind of portfolio are temporary and, and so the only way that they become permanent losses is, is not something [00:03:30] that the S& P 500 did to the investor.

ocks are risky and bonds are [: 00:03:45

Industry defines risk and safety for the investor in [00:04:00] terms of the need to protect their principle. So if somebody has a million dollars to invest, the industry says, we've got to protect that principle. And when they say protect it, they're not discussing protecting it from disappearing [00:04:15] because of a decline in the value of his stock holdings.

the stocks shouldn't be, um, [: 00:04:30

But what bonds do is they actually freeze the value of every dollar invested in them until their [00:05:00] maturity date, when they owe the money back to the investor. So let's say the investor loans a million dollars to Apple computer and for 10 years the investor gets 3 percent a year in interest. At the end of the 10th year, the investor gets back the million dollars they invested.[00:05:15]

ecause risk and safety needs [: 00:05:30

And so when we reframe risk and safety in those terms, we, we learn something that's actually shocking to most investors, because what we're now telling people is. Not something different than what they've [00:06:00] always been told, which is that stocks are risky and bonds are safe. We're telling us something directly opposed to it.

ing power, those investments [: 00:06:15

In [00:06:30] 1970, uh, the, the Standard Poor's 500 Index, uh, was at 100. Today it's 60 times higher. So a million dollars invested then has turned into 60 million. Um, what do you need [00:06:45] to buy what 60 million bought, what a million bought then, uh, today? That's to say, what did inflation do over, over that period of time from 1970?

. So [: 00:07:00

Now, had I bought a bond back then for a million dollars and it was maturing today, I'd get my million dollars back, not 60 million. And in the last year, even if the bond was paying me 10 percent a year, I would have gotten [00:07:30] 100, 000 in income. I need, uh, I, I need, uh, about, uh, two and a half times that. I need, sorry, I need about six times that amount, or seven times that amount.

in [: 00:07:45

And the only investment that's done that, as I just demonstrated over long [00:08:15] periods of time, is investments in great companies. So, um, when we, when we, when we educate people about this phenomenon, they can understand it. And so, They can look at all of history and they could see in [00:08:30] any of the periods they look at, that both the dividends on stocks and the stock prices themselves far outpace inflation.

percent [: 00:08:45

The risk of stocks wiping them out. A deep belief in something that can overwhelmingly be shown to have never, Again, as we sit here today, we're basically [00:09:15] at new highs. So that's why this podcast was created. I really want to give the audience an opportunity to, to learn, um, what I believe are some of the problems that are endemic [00:09:30] across the industry, uh, as, as it relates to, uh, misdefining risk and safety, as it relates to, uh, the folly of, of.

what we talked about in last [: 00:09:45

That protects them against what I call the sequence of return risk. So what happens if I retire in 2007 [00:10:15] and then the next two years it's 2008, nine, the market's down 60 percent I now have, um, if I was all stocks had to liquidate my stocks at a temporary decline, lock in a permanent loss. We don't want to do [00:10:30] that.

stry might advise us to when [: 00:10:45

These are the things that destroy my purchasing power. Uh, if you have two to three years living expenses, what I find is as an investor, you would have only about 10 percent of your money [00:11:00] in bonds. So an extra 30 percent would be compounding historically at two and a half times more than you would Then what the bonds would be, and it makes the difference for a lot of people, not in just terms of legacy that they leave behind, but in terms of their [00:11:15] ability to maintain their lifestyle, given the ever increasing cost of goods and services.

. If you're listening to the [: 00:11:30

They're not a cure of it. Uh, once you learn that, you [00:11:45] have to understand that crises are going to happen all the time. One year at five or six, you're going to see your stock portfolio, uh, appear to disappear to the tune of 33%. That's the average bear market or market that's down [00:12:00] 20 percent from recent high.

d then every year since about: 1980

And the crises that, uh, that, that occur at the time the markets go down, [00:12:30] whether it was the financial crisis in 2008. Whether it was COVID in 2020, or, or whether it was the, uh, stock market crash in, in two, in 1987, went down, still holds a record for the single biggest daily decline, or [00:12:45] whether it was the terrorist attacks followed by the dot com bubble bursting in 2000, um, each time these things happen, we could not have predicted them in advance, uh, and, and we don't, we didn't know when they [00:13:00] would happen, nor when they would end.

stay with it, is you need to [: 00:13:15

And what it means You need to be able to understand that every 10 years or so, there's going to be some big crisis. And, and, and whether it was [00:13:30] in, uh, in 2000, again, with the dot com bubble, 1990, we had the biggest, one of the biggest savings and loan crises. 2020, you had the, you had the terrorist attacks and almost 10 years before that, or 12 years, you had.

crisis. So [: 00:13:45

It's the fact that each one is different. different. And if you ever listen to yourself as an investor who wants to get out of the market, you'll see that you, you often, or friends will sing what I call the four, [00:14:15] uh, word death song of the American investor. This time is different. And, and in, in, practical terms.

us time, uh, based on all of [: 00:14:30

We're going to recover. Companies are resilient. [00:14:45] Companies are innovating. Uh, companies are logical when they, when they're dealing with a crisis, they're going to work on it, in it, and around it. That's the job of these highly paid management teams at the companies. They've got to maximize shareholder value.

tern governments who go into [: 00:15:00

So, so going into a crisis and, and coming out, having not reacted by selling stocks, that's not anti fragile. You came out the same way. [00:15:30] You're still going to be concerned the next time. Anti fragile is when you start coming out of the crisis, say during the crisis, where can I get more money? Can I mortgage my house to buy more at these discount levels?

you've become anti fragile. [: 00:15:45

And that the real risk of money is having the purchasing power of it disappear because we freeze too much of it in instruments that freeze. fix the, uh, the [00:16:15] level of the interest at five or six or whatever percent for the term of the bond and also freeze the principle for the term of the bond. We understand the real risk is that and that stocks are the cure.

succeed as investors and to [: 00:16:30

com, and our podcast episode website, CrazyWealthyPodcast. com. Thanks again for listening and look forward to talking to you again in a couple of [00:17:00] weeks.

up for our newsletter, visit [: 00:17:15

Disclaimer: Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy, already non investment related or planning services, discussion or content will be profitable, be suitable for your portfolio or individual situation.

Fusion's investment advisor [: 00:17:45

No portion of the video content should be construed by a client or prospective client as a guarantee that he or she will [00:18:00] experience a certain level of results if Fusion is engaged or continues to be engaged to provide investment advisory services. A copy of Fusion's current written disclosure brochure discussing our advisory services and fees is available upon request or at www.fusionfamilywealth.com.