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Transcript
Zach:
Hey, everyone. Welcome to the Retirement Today podcast. My name is Zach Holcomb and alongside me as always, we have Michael Reese. He’s a certified financial planner and founder and president of Centennial Advisors. Mike, how are you today?
Mike:
I’m great, and by the way, if you’re paying attention, we got this new kind of set thing.
Zach:
If you’re watching the podcast, not listening, we’ve got a brand new setup, super, super excited about it.
Mike:
Yeah, we got this new guy we hired, who’s like really smart with video and stuff, right? So anyway I’m just mostly, if you’re watching, I’m just mostly concerned that this video does not make me look fat.
Zach:
That’s what post production is for.
Mike:
There we go. So anyway, what do we got on our agenda today, Zach?
Zach:
Super pumped about our topic today. I’ve been hearing a lot about this lately from some of our clients in the media and in the news. There’s a lot of worry that we’re going to experience a market crash here in the near future. Now, near future could be tomorrow, could be a month from now, could be a few years down the road, we don’t exactly know.
Mike:
Yeah, that’s right, we are hearing a lot about that, and you know, it’s kind of one of these things, I think I spoke to our clients about this back in our January year end review, where last year, January of 2020, I remember that everyone was really concerned about whether or not the market was overheated, that it was like valued really high.
Zach:
Right.
Mike:
And everybody was worried about that, and they’re like, “when’s the market gonna crash? When’s the market gonna crash?” and then along comes COVID and bang it crashes, but then there’s this V-shaped recovery. So what happened is by the end of the year, the stock market was actually 18% higher than where it started. So at the beginning of 2020, we’re all freaking out like, “Oh my gosh, the market’s overvalued. It’s going to crash soon.” And then by the end of 2020 at the end of the year, now it’s even higher,
Zach:
Right.
Mike:
Like 20% higher almost.
Zach:
Right.
Mike:
And yet the economy is way worse off.
Zach:
Right.
Mike:
Right? So we’ve got, the economy is going downhill, but somehow, it’s like economy going down, but the market’s going up. Huge disconnect happens.
Zach:
Right, right.
Mike:
So it’s natural that people are worried about that. Plus, there’s been in the news, a lot of the financial news, they’ve been talking about the Warren buffet indicator right now. You know what that is?
Zach:
Well, it’s when action he’s taking at Berkshire Hathaway. Is it like that the market’s going to crash?
Mike:
No, it’s good, good thought. The Warren buffet indicator, his favorite economic indicator is what he does is he measures like the total value of the stock market. So what are all these companies worth on the stock market?
Zach:
Right.
Mike:
And then he compares that to the size of the economy. So the size of the stock market compared to the size of the economy. And there’s kind of a, a happy place according to Warren. And if the market is too overvalued or too undervalued, it tells him, gosh, it looks like the markets are going to crash or there’s going to be a very difficult time ahead or, hey, look, the market’s really undervalued, it’s a great time to invest.
Zach:
Right.
Mike:
So right now that indicator is the highest it’s ever been. It’s the most overvalued it’s ever been. So we’ve got a wildly overvalued stock market according to that indicator, and naturally everyone’s wondering, okay, when is the bubble going to pop?
Zach:
Right.
Mike:
Right? So the first thing I think we want to talk about is when is the bubble going to pop? So I don’t know for those of you watching this is our crystal ball. Yes. We have a crystal ball. If I, if I gaze into the crystal ball and do a little meditation at the same time all I see, just so you know, when I gaze in the crystal ball is I see kind of a magnified version of Zach on the other side of the crystal ball. So it doesn’t really tell me anything. It doesn’t seem to be working right now.
Zach:
I’ll troubleshoot it after today’s show.
Mike:
I’m not sure it ever works. Maybe we can Google an answer. But when’s the market going to crash? You know, we don’t know that, we never know that long-term markets are driven by fundamentals.
Zach:
Right.
Mike:
Right? So fundamentally, what are companies earning? Are their earnings growing? Are their revenues growing? You know, are they healthy? That’s what drives markets, right? Long-Term. The problem is in the short run, it’s all about emotion,
Zach:
Right.
Mike:
All about emotion. And if all we need is to look at game stop recently, for an example of how emotion drives things.
Zach:
That was a very emotional event, for a lot of people.
Mike:
I’m just going to say that in my personal account I profited greatly as it went down in value after it peaked out. So that was kind of good for me. But the point is, emotions drive markets in the short run and fundamentals drive markets in the long run. So the question is, is it more like 1995 right now? Or is it more like 1999? So what do I mean by that? In 1995, Alan Greenspan, he was the chairman of the fed at the time or something like that. Anyway, he came out and said, Hey, there is irrational exuberance in the markets, irrational, exuberance, meaning this is crazy, there’s no reason for the markets to be priced this high. That was 1995. Now, after he said that we had 96, 97, 98, 99, four years where the markets earn, you know, north of 20% a year after they doubled in value,
Zach:
Amazing growth.
Mike:
Right. So, so he said that in 95, the markets are, and this was December of 95, he said, the markets are out of control they’re so overheated, and then they doubled beyond that. Why? Fundamentally there was no reason for that, but emotionally markets were going.
Zach:
So what you’re saying is short-term, that could even be something like five years, beause you said this was an emotionally driven event.
Mike:
Right. Yeah, It doesn’t have to be long, like short-term could be a five-year period.
Zach:
Right.
Mike:
So where are we right now? Right. Think about Bitcoin. Bitcoin’s a good example of this right now. It’s like, you have people fear of missing out, you know, FOMO. It’s like, everybody’s getting in, they’re like, “Oh no, I’m going to miss out”. Usually, that fear of missing out happens towards the end of the bull run and there’s a crash likely to follow.
Zach:
Right.
Mike:
So right now we can say are markets fundamentally over-valued? Unquestionably.
Zach:
Sure, absolutely.
Mike:
Unquestionably. They are overvalued. They in fact, to get to true market value, to fair market value, they’ve got to lose about 50%.
Zach:
Right.
Mike:
So is there likely going to be a 50% market drop on the horizon? I believe there’s a very high probability of that. Now I may be wrong, I hope I’m wrong, but there may, that may very well happen.
Zach:
Right.
Mike:
So the question is of course, when?
Mike:
Right.
Mike:
We don’t know when. And that brings up. I kind of, I believe the next kind of general area that we wanna talk about today, which is, okay, we know markets are over valued, so what do we need to do with our investing in order to protect ourselves if such an event to occur.
Zach:
Right, because it’s going to be the unexpected, so we want to be prepared when that time comes.
Mike:
Yeah. I mean, imagine that you’ve worked your whole life and you know, you saved a million dollars, right? I mean, that’s a lot of money and you saved and saved and saved. You got a million dollars. If the Mar- and you have a bunch of your money in the market, the market loses half its value, you could see 300, 400, $500,000 evaporate, and when markets go South, they go South fast. Right. So how do we protect the money we’ve worked so hard to build? So I’m going to answer this in a couple of different ways.
Zach:
Okay.
Mike:
And so this is what we do, right? Number one, the first way you protect yourself is that you want to be purposeful in identifying what portions of your portfolio you’re going to use for income, whether, if you’re already retired, the money you’re going to use for income now, or if you’re going to retire in the next few years, money that you’re going to use when you retire. But you want to be purposeful in carving out a certain percentage of your portfolio in income producing assets.
Zach:
Now, when you say that you’re talking about safe assets, when we’re talking about income, okay.
Mike:
Right. Things that are safe that you can use to generate income.
Zach:
Sure.
Mike:
So if you, I was talking to someone the other day where we identified, they were getting they’re, they’re just going to retire here, coming up in 2021 here.
Zach:
Right.
Mike:
And they wanted to get their accounts set up in such a way that it would make sense for them, and we figured out that in their case, we had to take roughly 55% of their money and put it in things that were income producing assets.
Zach:
Right.
Mike:
And if we did that, that would generate income for them for the next 20, 25 years, no matter what the markets do. Then you take the other 45%, you put it into growth assets where it could now grow for 20, 25 years, and you know, there’ll be good times, bad times during that 20, 25 years but if you have longer periods of time like that, you can kind of ride them out.
Zach:
Right.
Mike:
So it’s a way that you can buy time for a portion of your portfolio.
Zach:
Right.
Mike:
So that’s one way that you can really work towards, you may be immunizing yourself from the impact what the market’s doing.
Zach:
Sure.
Mike:
Especially if you’re retired or nearing retirement.
Zach:
Okay.
Mike:
Now what if you’re further out though? What if you’re more than five years away from retirement, you know, or maybe you’re 10 years away or gosh, and then again, the money, even if you are retired or nearing retirement, the money that you have in the growth side of your portfolio, how do you protect yourself there?
Zach:
Sure.
Mike:
That’s where we use a lot of algorithms. Now, algorithms, that’s a great, you know, big, long word with, you know, many consonants, or many, what is it? Syllables!
Zach:
Syllables, yes.
Mike:
Al-Go-Ri-Thms, basically it’s a fancy word that says it’s a number of formulas,
Zach:
Right.
Mike:
A lot of if then statements, where you say, “Wow, if the market does this, we do that”. So it’s kind of a, you know, a set of rules that are set in advance,
Zach:
Right, so like if this event happens, we’re prepared for it in this way.
Mike:
Yeah. If the hundred, if the, if the market falls below the hundred day moving average, we should get out of the market to some degree, I mean, that’s an example. So anyway, we use a number of algorithms to help us in, to help indicate when should we exit markets and when should we get back into markets?
Zach:
Sure.
Mike:
And as we’re recording this, which is getting close to the end of February even in our growth portfolio right now, our algorithms, half the money is out of the market right now.
Zach:
Right.
Mike:
I mean, right now we only have, in our, this is our growth portfolios, and even our aggressive growth portfolios, only half of the money is in the markets. We’ve already taken half out. And it’s just kind of sitting in the sidelines and fixed income or cash, somewhere where it’s safe, where because we’re, you know, the algorithms are telling us, you know, there’s a lot of concern out there over the market activity. In our conservative growth account, we only have like, gosh, 25, 30% in markets right now. So we use a lot of algorithms to help make decisions as to when to be in markets, be out of them. Right now the algorithms are getting very cautious.
Zach:
Okay.
Mike:
Right. We could say it that way.
Mike:
Gotcha. Okay, so we’re looking at algorithms and we’re also looking at how your money is allocated.
Mike:
Kinda big picture allocations. Those are the two big ways that you protect your money.
Zach:
Okay. Gotcha. So any other ideas or suggestions?
Mike:
Yeah. Here’s the thing. If you haven’t had your portfolio looked at in a while, now is the time, now. I mean, stop procrastinating. Look, if you look, I’m talking to you, if you haven’t had your portfolio looked at in awhile, right. If you’re a client, you don’t have to worry about it, but if you’re maybe one of one of your friends forwarded this to you or something like that, now is the time you’ve got to have your portfolio looked at to make sure that you’re in good shape, that you’re protected if the markets go against you. You know, I had a great conversation with someone the other day and, and we talked about this, I said, “Hey, what if the markets go up another 20% this year? How’s that going to affect your lifestyle?” And their answer? “Not At all.” “Well, what if they go down 20% this year? What happens then?” They’re like, “Holy cow, we wouldn’t be able to retire when we want to.”
Zach:
Right. It’s a life changing event for some people.
Mike:
You gotta, you gotta be smart about that. You gotta be smart. So that’s, that’s kind of, I think our message for this week.
Zach:
Yeah, and great, you know you talked about, you know, if you haven’t had your portfolio looked at, now’s a great time to do it, and we offer that to potential clients and people who are interested in having that done.
Mike:
Yeah, that’s right. So, if you haven’t had that done and you want to have it done what do you do? You go to talktomike.com, call the phone number, Zach, why don’t you share some of the ways to do that?
Zach:
We have two great options for getting in contact with us. You can just give us a call at our office 5122655000. Or you can go to talktomike.com. It goes straight to our online calendar and you can book a quick 15 minute call with our team, just so we have the opportunity to learn a little bit about you, your situation and see if our areas of expertise can provide you some value.
Mike:
I mean, yeah, that’s it. The bottom line is let’s have a conversation, right? Let’s find out, can we be helpful? Right. And our goal when you make, when we do these phone calls, our goals, I want everybody, when you hang up the phone, I want you to say to yourself, “man, I’m glad I called. That was really helpful”, right? That’s our, that’s our mission. It doesn’t mean we’re going to work together or not, but here’s the deal you got to think to yourself. What’s it going to cost you? If the markets go South and you’re not prepared. What’s it going to cost you? What’s it going to cost you in money, in stress, right, in lost time, because you have to work longer than you wanted to. I mean, you don’t want to deal with that. Just make a quick 15 minute phone call. Let’s get this resolved, right? Let us give you some good advice so you can be better protected so that you can truly live your best that is yet to come.
Zach:
Mike, I think that’s a great way to wrap today’s program, but any final thoughts before we hop off the air here today?
Mike:
I think, I think we’re good. I think that was a good message this week. Again, don’t procrastinate. Take action.
Zach:
Absolutely. Everyone. Thanks so much for listening. We’ll see you next week.
