Bulls, Bears, and Pigs

0:00 Welcome to something more with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president, financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it something more because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to the show, everyone. Thanks for being with us. I'm Chris Boyd, a certified financial planner, practitioner here with Jeff Perry and Russ Ball, both of whom are with me on the AMR team at Wealth Enhancement Group, and we're going to talk a little bit about markets and pensions today, so to start things off, great headline I saw yesterday across my phone, markets hit new high, and we keep hitting new highs.

1:06 What was it, Jeff? You said it was both the S&P and the NASDAQ? That's correct. Yeah. And I think on the one hand that gets people excited, hey, all right, new highs, and then at the other hand, it gets people nervous, like, oh my gosh. It's been quite a couple of years here. Yeah. We've had some really good run just in the neighborhood of up 25% last year and this year, thus far, so the year's not over, but about a month to go, and we'll see where we land when all is said and done, but it does cause you to think about, on the one hand, am I getting enough of that, and then on the other hand, should I be worried about the other shoe going to drop, that kind of thing, so you get these different kinds of anxieties that bubble up.

2:05 You know, my little favorite saying here, bulls make money, bears make money, and pigs get slaughtered. So where are you in that perspective today? When you think about the market, is someone being a pig? Are they staying too long? Maybe. It's a coincidence that you wanted to talk about this today because I recently saw, I think it was this morning or yesterday afternoon, commentary on CNBC that there has not been a correction 10% decline in the market this year, which, you know, corrections are normal, you say this all the time, Chris, corrections are normal parts of the market cycles, even in a bull market, a 10% pullback is normal, we shouldn't- That inhale, exhale kind of thing, right?

3:05 It's just a normal course of activity. It is surprising we haven't had a full 10% drawdown this year. I was looking at a JP Morgan slide, it showed that there was about an 8 % decline thus far this year. So I'm going to answer your question. I don't want to evade it by referring to CNBC. I'm a bull, I'm a long-term bull, but I think it's prudent when you have a nice run, staying away from the pig thing, is to take some profits, put them in either a holding area to reinvest in maybe a money market account, or if your risk tolerance has shifted because of gain, if your risk tolerance is what it is and your allocations have shifted, and now you have all this much greater exposure to stocks, it might be a time to rebalance and say, okay, I have too much stock for my comfort level, let me put some off to the side into a different type of investment that's not correlated with the stock market.

4:11 But I am a long-term bull. I believe in the country. I believe in free enterprise. I believe in the history of the stock market. So for my long-term money, and for our clients who have long-term horizons, I think the stock market has a place in their investment portfolio for sure, but make sure that your allocation isn't out of whack and that your risk tolerance is able to handle your current allocation. Really well said. Russ? Yeah, one thing, it's kind of been coming up again and again in client conversations we've been having, and we're just looking at the outperformance of the last year or two, I guess, and asking, are you comfortable with this amount of risk, like the fact that the market has gone up as much as it has, it could be a good time to rebalance even if, obviously we do our rebalancing quarterly, but I think just having a conversation, are you too risked in your portfolio?

5:11 Yeah, having that open conversation. Are you comfortable with where you're at? Yeah, and because the market's done so well, it could be a good time to take some of that risk off the table. If a change is pending, rather than after. Right, right. Chris, you do something with our clients that I've learned many things from you, but this one really is key. So when you say to a client, they may have a million dollar portfolio, for example, and you say, can you sustain a 10 or maybe even a 20% reduction in the market? Those are normal things that happen in the market. And you might get a quick yes, but then you frame it in the context of that would mean between 100 and $200,000.

5:53 And that their face just changes from 10 % when you say yes, it's a different thing to say $200,000, you know, wait a minute, wait a second. That's a lot of money, right? It is 20%, but it puts it into a little bit different. Yeah, it's exactly true. You got to make that material and if whatever someone's level of wealth happens to be right, the same principle applies. If you have $10,000 and people who have $10,000 say, well, if I had a lot of money, meaning a million dollars in that scenario, you know, they'd be like, oh, that'd be, I could live with that, but I can't afford to lose, you know, 20% in that scenario, right?

6:38 And if you have a million dollars, you think, well, 200,000, that's a lot of money. And so it really depends on the person, right, on what's going on in the rest of their context and what they're really willing to tolerate. I think it's worth pointing out that historically, we talk about it for a very long time, period of time, you know, 100 years, markets tend to go up two out of three years, but it doesn't happen that they necessarily go up every two years, you know, and then there's a third year and it doesn't, you know, it doesn't always happen sequentially that way. There can be periods of time where we have, think of the year 2000, where we have three years back to back with declines.

7:21 It's hard to tolerate. We've had the good fortune lately when markets go down, they come back very quickly. In 2000, rather 2020, we had a 20 % decline or whatever it was during the year, but it didn't end that far down. And it came back very quickly within a year, we were back in business, let's say, into the positives. When it came to 2022, you know, very quickly, we're back in the positives. So it's tough when you see markets drop, but we've had the good fortune that they've come back very rapidly in recent years.

8:05 And that's not always the case. Investors should be prepared for the way they think about their investments, as you described it, Jeff, long term in nature, and therefore you might be tolerant of a couple of bad years back to back, whatever it might be, so that it might take, what if it takes five years to recover? And what if it takes longer? You know, the 1970s, a prolonged period of time. You could even look at the 1990s, where, you know, you started at this peak at the end of the 1990s. And then in 2000s, rather, we have this peak, it declines, it comes back in 2007, peaks again, and then declines.

8:54 We end the decade not really much different from where we started the decade, probably even a little lower. And so there you look at that and say, well, you know, this can happen from time to time. It's not to say that it's always the case or that it's going to necessarily be the case. But when you look at year to year, markets move in different directions every year. Given time, you'd expect better performance. I'm looking at a slide from JP Morgan, going back to 1980 through the end of the month, November 30th, a couple of days ago. And it's suggesting that the average annualized returns over that period of time was around 14%.

9:44 That's good. Yeah, isn't that awesome, right? Very good, yeah. And yet 33 of the 44 years involved were positive and 11 were negative. That's still pretty good odds for, you know, better than the two out of three kind of... It's like three out of four, that one. It's more like three out of four, right? So, you know, something to be mindful of, but it is very common, even in years when markets end higher, that they've had a correction or a more substantial decline. We talk about this with clients that it's normal for markets to decline 10%, 15%, even 20%, in some cases more, right?

10:32 But, you know, we've been through in the 2000s and, you know, 2020, we've seen these more substantial declines. So, it's not unheard of for markets to get cut in half in our recent investment lifetime, not just looking back at, like, long history of things, you know. Just as if you've been an investor since 2000, you've incurred two periods of time where the markets essentially went from down about 50 % cumulatively in the case of 2000, 2001, 2002, and then again in 2020, where the market dropped...

11:21 No, sorry, 2008, right? The financial crisis, and then those were significant drops. And then I think in 2022, it was down about 34% in a year, and then it came back very quickly. But my point is, these are things that we don't think of as normal, but we've seen it. And as much as... And we're going to see it again. We're going to see it. And so, as much as things are really good right now, and I'm glad, and we're not trying to scare anyone to say that they're necessarily going to be terrible or anything, it's just you have to be mindful of the fact that markets move.

12:02 And we get more return from taking more risk because there is risk, and there will be declines. We just don't know when and how much at a given moment in time. But knowing that, we want to prepare. And we talk about this a lot, Jeff and Russ, when we talk with clients about buckets and the idea that we want to have low-risk money, a place for security and safety, some comfort-type money, and then something that's maybe a little less risk, but somewhere we could get at stuff we needed. And then we think longer term, more in line with our risk tolerance, whatever that is. Maybe you're a moderate investor.

12:42 Okay, whatever that looks like in aggregate. But we don't want to be too short -sighted, and we don't want to be ignoring risk. It's this trying to find this sweet spot for everyone's own circumstances and what's palatable for them. Right, and think about how long your time horizon is. I'll share a personal story that I've already shared on the radio, so I'll kind of give an update on it. I have a granddaughter who's going to college. She's a senior in high school, and we've had her 529 invested in an S&P fund forever. It's done very well. And on the show before, Chris, we talked about, so what are you going to leave it invested?

13:27 So just last week, because of the market gains, I took the first year of what we expect our contribution to put it in a money market. Yeah. And I left the rest in there for the other years because I feel like we're getting, another word I like to use, frothy. Markets are getting extended, and maybe they'll keep going. And if they do, that's great because 75 % of the money is still invested. Yeah. But I have that peace of mind that I know that- You're ready for whatever direction it's moving the short term. Right. You've got it prepared. And you can't feel bad. Like, what if the markets go higher, Jeff?

14:08 You'll have missed out on that extra percentage of returns. Just for the first year. I didn't get nervous or make some emotional decision and say, it's all coming out and miss the next four years, if you will, of opportunity. I just made a strategic, I guess, decision. And I think some of that is also your tolerance and temperament for risk. Someone else might say, well, maybe I don't want to risk it for the next two years, you know what I mean? Very personal, right? Yeah, it could be somewhat of a personal evaluation, right? But yeah, I think that's a good example, a good illustration of that notion.

14:48 And you can't live in the past, too. If you make that call, make that judgment, you're doing something that gives you comfort because of its absolute. And then you can't live in the, oh, if only I had, what if I had done? It's one of these things where there's no way to know in the short term what's going to move good or bad, better off to just say, this gives me peace of mind, whatever direction, that is staying invested or and living with the risk or pulling the money off and living with the diminished return potentially, you know, that kind of thing, the absolute of having it on hand, you know. We do hear a lot of clients or people that we engage with saying, I'm going to stay invested until I see something that I'm concerned about or, you know, I'm going to stay on the sidelines until something happens.

15:35 Yeah, yeah. These, these corrections or bear markets happen quick when they happen. So I know I can't time the market successfully. And I don't think there's anyone who really can over the long term. People get famous for doing it once. Yeah. Yeah. Right. Right. But where they go after that, you know, that kind of gets. Oh, I guess my point for listeners on this topic is we've had a great year. We've had a great two years. Um, after some, you know, a rough year, but the prior, you know, three years before that, again, really fabulous double digit returns. So, uh, what's my message.

16:16 Markets are volatile. We've had a good run. Um, it's, it's okay to, to stay the course or all that. And you should have a plan that works, but expect volatility. And as much as, um, we, we may benefit from, uh, just a consistently rising market, but that's not normal, you know, so expect bumps in the road. And if you don't want to tolerate those bumps in the road, reassess your level of risk and what you're willing to tolerate. Um, and maybe, uh, as you talked about earlier, one of you guys, the idea of rebalancing, you know, this is probably a reasonable time as we look to, uh, moving toward year end, start a new year.

16:59 Um, it's probably a good time to reassess what's the right level of risk. And do I have the right allocation? If you do rebalance, cause you've had this disrupt, you know, this, this. Disproportionate return in the last couple of years that it, if you haven't rebalanced it's time, you know, and that forces you to do the discipline of selling high and buying low. And that's a good thing over time. You know what I mean? So it's a good thing. Yeah. So in any case, um, something just food for thought as we, you know, look ahead. Um, I wanted to also talk about a couple of other things. If we can switch gears, um, we probably could end the show there and be like, okay, that was one episode, but I got some more to talk about.

17:44 Um, I had a conversation last night and Jeff, uh, you came to mind. I thought, oh, this would be a good one to, uh, clarify for people. Um, have clients who are, um, planning for their retirement and they're, um, in their fifties, but getting closer to, um, you know, thinking about retirement at either 60 or 65, right? So it's, it's a few years off, but they're getting close. Great time to have this discussion. And so, you know, we had the good, um, financial planning, you know, kind of modeling. But when push came to shove, they were like, well, I'd really rather retire at this age and that age.

18:28 So one, you know, one for him and one for her. So she has a, um, public, uh, pension. Um, so it's the, um, the teacher's retirement system in Massachusetts, Massachusetts. Yep. So she had been looking at things and saying, well, if I work till age 65, she had calculated the numbers for years of service and, um, the amount of, uh, the age she would be at the time. Three fact, three factors, right. And her income. So she was kind of looking at it saying, all right, this is what I think my pension number would be.

19:10 And then we talked about the possibility of retiring sooner. And the question that she's like, oh, it'll change my numbers completely. I was like, yes, it would, but you know, you don't necessarily have to turn it on right away. True. And that was what created the, oh, well, how would that work? You know that? So I just thought maybe you'd want to elaborate on, um, does the number change, uh, if, if the years of service doesn't change, you know, or is it like these two distinct factors? So like every financial planning question, it depends. So in Massachusetts, there are three factors. And when you reach the maximum factor of any maximum level of any one factor, it does not go up.

19:57 So the maximum factor for the number of years of service is 32. And she does not have that, right? So she works more, say she had 25, for example, right now, if she 20 right now. So if she has 20, you need 10, by the way, to even have that. And have this discussion, but so she has 20. So for the next 12 years, she'll get an increase in her ultimate pension. If she adds a year's year service, the match max factor for most public pensions in Massachusetts, 65. So if you're below 65, you to get a small reduction for each year you're below. And then depending on when you started your state service for her 20 years ago, it's the highest of the average of the it's the average of the highest three years of salary.

20:48 And so if you work longer and your pay is going up, you know, like most public employees, they get two or 3% raise every year, that factor of the average of the highest three would also be going up. So for someone who's going to have a higher salary, only has 20 years and is below 65 each year, all three of her factors are going to be going up. Now, whether that's enough of a change over the next 12 years or 10 years is kind of a personal decision. Doesn't mean she has to stop working. Also. She could, as you alluded to, she could stop her public service and not take her pension.

21:33 Yeah, obviously her years of service wouldn't be gaining and her highest three years wouldn't change, but her age factor would, she could wait until 65. I was going with it that, you know, say she wanted to, that's a good analogy, you know, example or illustration. It was 65, 70, whatever the number is. Right. Let's say 65, she delayed. Right. And no reason to, no reason to delay past 65 for this situation. Right. You're right. So, um, so let's say for example, you know, she says, I want to stop working in three years or whatever it is, instead of waiting until 65 or, you know, that kind of a number. Well, okay. Then you could stop working.

22:15 Whatever your years of services would be locked. That number of years of service, say 23, 23. And then she, she doesn't have to turn it on at that age. She couldn't wait. And I think that was where she was like, Oh, how does that factor in? You know, that there's a different calculus at that point. It's a math, it's a math question. Yeah. So it's a, that becomes a, maybe you wait a couple of years and when you, when you're ready to turn on the income, if you want it to, if they wanted to start it right away, they can do that, but they'd have their choice of those aren't necessarily the same decision when you retire and when you start the pension, aren't the same, it don't have to be. And the same is true with social security.

22:56 When you, when you, when you retire and when you turn on social security, doesn't have to be the same time. That's right. You know, the public pension, there is a secondary level of question is where are you getting your health insurance? Because if she stops working, she'll lose her employee benefit. If she retires, you know, she, and she was, well, if she gets a 60 retirement is turning on the pension in that case. Right, right. But she could retire now or in three years and still have the health benefit, even though she's not 65, her health benefit would change from the state when she is 65, but you can't pause your retirement and could get the health benefit is what I'm saying.

23:40 That's a great point. That's a great, uh, that's additional consideration. So in their case, uh, this family's case, if they do it before 65, that might be a relevant consideration to where they want to draw their benefits from. Yeah. And the other question that's always in this subject is survivor benefit. In Massachusetts. If you collect your full pension, it's on your life only the employee's life. If you leave your survivor, typically a spouse, you'd lose, lose roughly a third round number of your monthly benefit, but the pension would survive you and go to a second life.

24:21 In other words, the death of the second life, your spouse, and that's just a personal decision based upon a lot of factors, age, health, other pensions, other assets. Well, that's the other topic I wanted to bring up when coming into the topic of pensions. I had another scenario where we got, uh, an inquiry from a client saying, you know, we have this pension option. It includes the possibility of a lump sum as one possibility for private pension. It is a private pension in this case. Um, they also have, um, you know, this decision of, well, what should we do when it comes to the, the, the monthly income, if they opt for that.

25:06 So they have, you know, this range of possibilities to evaluate. And, you know, I think this is a tough one sometimes because, um, you know, on the one hand there's an impulse to say, well, I want that cash, you know, let's, let's control this whole thing. Uh, and then on the other hand, some people say, I want to guarantee, you know, I like the absolute. I don't have to worry about it. I know what I'm in for as long as I live, both of us live, whatever the way they choose it. Right. Right. So, um, it becomes sort of, uh, a challenge to say, well, how should we think about this? And life expectancy does certainly factor into how you think about this.

25:50 Um, if you envision of a prolonged life expectancy, that there really does help make the case to, to suggest that maybe the absolutes, the guarantees of, uh, the pension options might, and maybe the, some, some manner of survivor benefit, you know, would have virtue. Um, another possibility would be, um, to think in terms of, um, you know, if, if you don't think there's a long life expectancy involved, well, the idea of a larger lump sum that you might have assets to retain, to pass on as wealth, uh, that you aren't worried about the risk of running out of.

26:42 I think in this case, it also comes down to what are the other assets involved? Uh, how, how much do you spend? Where's that money coming from? Right. If there's demand for resources, more resources, then, you know, then the pension might be the right way to go. If, if you've got maybe more coming in than you need, well, then a lump sum sounds pretty appealing, you know, you can control that a little bit more. I don't know. Anyway, I just thought that was another variable talking about pension discussion. I think that's the whole episode that, that question of a private pension, lump sum on your social security, all of these factors is probably a whole episode.

27:33 Well, recent, uh, conversation we had, Chris was, um, you were kind of comparing what is the return you can get based on that lump sum per year. And it's like, can we beat that number by having invested? And if not, yeah, there, there used to be circumstances, um, you know, 20, 25 years ago, we'd, we'd sit down with people who had a pension and, uh, the formula for how they calculated the lump sum had to do with interest rates and, you know, 25 years ago, interest rates had dropped from being, you know, historically more normal to that zero or very low interest rate environment.

28:14 And, um, suddenly these lump sums were fabulous, you know, and you'd say, well, we can make 4%, you know, whatever, you know, uh, let's just take some risk, you know, that kind of thing. Uh, when I was doing this recently, what was it like more like 8% that, uh, they, you know, they'd have to be able to consistently earn. Well, if you're going to expect 8%, some of that's coming off a principle in all likelihood over a retirement, right. The level of risk you'd be willing to tolerate volatility that you'd expect, you know, there's going to be down years and some of that comes out of capital. Right. So, um, you know, it's less of an absolute, you know, so that kind of thing.

29:00 So it becomes a question of, well, let's take a look at what's that rate of return. Uh, how, how much can, how long could we expect that to last? Um, even, you know, with some market disruptions and things like that, the way you'd be invested, that sort of thing, what's the rate of return we might anticipate from something like that. And then again, it's not an absolute. It's, it's a, a calculated risk. Right. Um, so again, all these variables of how's it fit into the whole becomes part of that equation. Uh, but yeah, Jeff, it probably should be its own conversation.

29:40 And so there's a lot to evaluate. There's the whole idea of, do I, um, take the lump sum? Do I take a pension with a single life and buy some life insurance? And that's, that's where I was going. Yeah. Yeah. So replicate that, uh, potential for keeping.