Fix It Friday - Beyond Bear Markets and Recessions: Learn the Two Biggest Risks to Investor Wealth

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.

Jonathan Blau: We don't seek out from a human nature perspective. Uh, things that are going to benefit us over the long term. We have what's called a loss aversion bias.

It simply means that the [: 00:00:30

Voiceover: Welcome to the crazy wealthy podcast with your host, Jonathan Blau, whether you're just starting out or are an experienced investor, join Jonathan as he seeks to illuminate and demystify the complexities of [00:01:00] making consistently rational financial decisions under conditions of uncertainty. He'll chat with professionals from the advice world, entrepreneurs, executives.

[: 00:01:15

Jonathan Blau: welcome to another episode of Fix It Friday, um, coming to you again from sunny Florida. Uh, hope, hopefully, uh, those in New [00:01:30] York will, uh, will not avoid listening to the podcast, uh, out of envy, but, um, but hopefully those who are watching will feel some of the warmth that's emanating from behind us. So today I want to talk about, uh, what I, what I believe are the two biggest threats to [00:01:45] investor wealth.

ings like volatility or, uh, [: 00:02:00

And, and none of those that I just mentioned are [00:02:15] one of the two biggest threats. So there's a, there's an external threat and an internal threat. Um, and the external one is what I call inflation. Inflation just means that, um, if I have a hundred dollars [00:02:30] today, uh, and I, and I perfectly preserve it for the next 30 years so that I still have a hundred dollars, it didn't disappear.

y money hasn't kept up. With [: 00:02:45

[00:03:00] So, our investments need to be able to, at the very least, keep up with inflation, hopefully beat it. Most of the time, what happens is, from an investment standpoint, we as investors don't seek out the investments that historically have not only [00:03:15] kept up with inflation, but beat it handsomely. Instead, we seek out investments that Uh, if I call inflation the disease of money, we seek out investments that don't cure the disease, but carry the disease.

we call bonds, fixed income [: 00:03:30

By year 30, I need two and a half times the 5 percent to buy with inflation, but I've long since run out of money, uh, because I've had to unwind the principle to keep up with the fact that the price of things kept going up and my investments weren't doing it. So [00:04:00] why, why do we do that? Why do investors, uh, behave that way?

n bias. It simply means that [: 00:04:15

So, so what we seek out is, is investments and activities that minimize the short term chance of loss and maximize the short term chance of [00:04:30] pleasure. The very investments that will get us, uh, to, to keep up and beat inflation are not that. Those are investments in real assets or companies. That we can, uh, gain ownership of through certificates.

So, so that's what [: 00:04:45

As long as the things that we're talking about investing in. Uh, don't have ambiguity, [00:05:15] meaning there's some certainty affixed to the timing and the amount that we'll make on the investment and that's, that's characteristic of bonds. Stocks don't move in straight lines like that. They, they, they have ambiguity and, and that's a bias that we have.

We try to avoid [: 00:05:30

So what happens is with all the biases that we have, I just described loss aversion, we tend to make the opposite decisions, um, than the ones that we need to make for long term success. [00:06:00] And, uh, and, and if we don't fight those biases and become aware of them, which we can do. Through all of the podcast series that, that the fix of Friday's cover.

I cover a different kind of [: 00:06:15

Now, when I said that volatility and bear markets [00:06:30] are not a threat, let me give you an example. In 1973, which was the beginning of the first of last 52 years, uh, 50 percent decline in the stock market, 73 and four. We had three 50% or more declines [00:06:45] since then in the last 52 years. So 73, 4 was the first of 2000 to oh two was the second, and 2008, nine, the credit crisis was the third.

years, we had [: 00:07:00

Inflation went up only 8 times. So, stocks, uh, didn't just help us keep up with inflation. It actually increased our cost of living about, uh, 6 times more [00:07:30] than inflation. Means that we could buy 6, 6, 6 times the goods and services. Inflation adjustment that we did 52 years ago. Dividends that get paid to us as shareholders in the form of quarterly cash payments from the companies that [00:07:45] we own increased 24 times during that period while inflation was up eight times.

the investors. Who took the [: 00:08:00

Nobody has ever lost money in it other than if they created the loss themselves by reacting. Um, and we talk about bonds, by the way, I'll just interject with this. Uh, it's not that I don't believe in bonds at all. I just don't believe that bonds should be in a portfolio to mute [00:08:30] volatility or up and down movements, uh, over, over the longterm average.

ext two years in the markets [: 00:08:45

So to protect against that potential, I want to have two to three years of bonds. Set aside so that I can [00:09:00] switch my spending in retirement to that pool of capital and not be forced to sell stocks while they're temporarily down. And the reason I suggest two to three years is going back in history, the average from a peak in the stock market to a trough, a bottom, and back to a [00:09:15] new high has taken 40 months.

tion hedge. So going back to [: 00:09:30

So it's gone up 60 times or so. Gold back in 1980 hit a peak when, uh, the inflation that peaked in 1979 under Jimmy Carter's presidency, um, was, [00:09:45] was actually battled when Paul Volcker came in as the federal reserve chairman and had a spike interest rates, very high to break the back of that inflation.

an ounce today, it's under [: 00:10:00

Most people would have been better off buying [00:10:15] comic books and, and saving those to hedge against inflation. Um, there is a fourth risk that I'll just touch on lightly. The media and the financial industry doesn't like to tell people that all you need to do is buy a diversified portfolio of index funds and stay [00:10:30] with it and let it compound because they only make money when people are nervous or take action.

eep. The cashflow coming in, [: 00:10:45

But, but the point is the media and the industry are actually another threat [00:11:00] to investors. I call them both wolf in sheep's clothing. So with that, um, I hope you enjoyed this episode of Fix It Friday. And you can get us on all your favorite podcast venues and crazywealthypodcast. com, as well as our website, [00:11:15] fusionfamilywealth.

com. Until next time, Jonathan Blau, signing off.

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Disclaimer: The previous podcast by fusion family [00:11:45] wealth, LLC fusion was intended for general information purposes. Only no portion of the podcast serves as the receipt of, or as a substitute for personalized investment advice from fusion or any other investment professional of your choosing. 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, or any non investment related or planning [00:12:00] services, discussion, or content will be profitable, be suitable for your portfolio or individual situation.

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