Fix It Friday Ep. 10 - The Three Most Important Numbers In Investing

• Understanding the "three most important numbers"—10%, 6%, and 3% for long-term wealth preservation.
• How to protect our portfolio in a bear market? Retirees should have two to three years of living expenses in low-risk investments to weather market volatility.
• Historical patterns show a 15% average annual decline in the S&P 500 since 1980, underscoring the need for a consistent strategy.
• Maintaining a long-term investment strategy is vital; avoid reactive decisions during market downturns for wealth preservation.
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Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth, LLC Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.

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: All right, welcome to Crazy Wealthy Fix It Friday. I'm gonna start today by sharing with you a parody of an advice, uh, construct that was 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] think it through. He says, what are you doing sitting there? Buy, sell, panic, said Rosa speaking to a young couple worried about their financial retirement account. Take that fear in your gut. Let it overwhelm you until you make [00:01:15] massive life altering financial decisions. Do it Quick.

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] At publishing time, Rosas had advised several clients to move all the money from their retirement accounts into something safe. Like Bitcoin. So I, I, I start with that today because we are, we're now approaching what's called a [00:02:00] bear market down 20% from recent highs. And what I just read to you is actually how people are gonna feel they should be reacting after they watch the catastrophism on the financial media, listen to their friends and, and respond to their own [00:02:15] human emotion bias based signals.

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

Voiceover: Welcome to The Crazy Wealthy Podcast with your host, Jonathan [00:02:30] Blau. Whether you're just starting out or are an experienced investor, join Jonathan as he seeks to illuminate and demystify the complexities of making consistently rational financial decisions. Under conditions of uncertainty, [00:02:45] he'll chat with professionals from the advice world, entrepreneurs, executives.

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

Jonathan Blau: Hi everybody. Thank you for tuning into another episode of Fix It Friday. I'm happy to be broadcasting today, uh, at a time when we are just about at a new bear market, uh, which is to say down about 20%, uh, in the s and p [00:03:15] 500 from its recent February highs.

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.

One is what I call the three most important numbers in investing in wealth management and, and the question that I [00:03:45] often get during periods. Like this, which is what portfolio decisions, what new portfolio decisions are you recommending that your clients make, uh, in order to be able to survive the environment that we're going through, uh, with their money.[00:04:00] 

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.

For when the times the market decline so that they don't have to be forced to sell stocks that are temporarily down to support their lifestyle. So those decisions have been made a long time ago when we [00:04:45] set up the plan. And whether you're going through a pandemic or a recession, uh, a political party that went out in favor of, or any other kind of crisis or volatility, those decisions, uh, don't change.

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?

To what end are we managing our wealth and what are we protecting it from, uh, over the long term? And, and the answer is we are, we're managing our wealth so that someday most of us, uh, who wanna retire, can retire [00:05:30] comfortably and stay comfortably retired from a financial perspective. And we're protecting our wealth from the disease as I call it, of money, which is inflation.

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.

A little bit more actually. Uh, six. Is the equivalent a hundred year return for a portfolio of bonds of similar types of companies. I say [00:06:15] similar types to the s and p because we didn't have exactly the same companies for the whole period, but it's oranges to oranges. Same types of companies bonds or lending money to those companies returned about 6% a year.

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.

So for example, if stocks have made 10% a year, uh, for the last a hundred years. Inflation has been three. The real return or after inflation, spendable return is 7% a year. And if bonds have made 6% a [00:07:00] year for the same a hundred years, and inflation is three, the real return for bonds is 3% a year. So stocks made seven after inflation, bonds made three.

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.

The s and p 500 at the beginning of the decade I was born was uh, 60 and today at 5,000, it's about 85 times higher, so a [00:07:45] hundred thousand is worth eight and a half million. Uh, and, and much more than than the million I need to buy what inflation adjusted goods and service it would cost me today. So investing in real assets that make or have made 7% a year after [00:08:00] inflation is critical to protecting our money from its biggest.

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.

So if we invested a hundred thousand dollars in in 1960. In in bonds today, [00:08:30] the bonds are still worth a hundred thousand because the bond principle doesn't grow and we've long since run out of money. So how is this related to the current environment? Well, in the current environment. When people are asking, what should we do differently [00:08:45] in, in order to protect our portfolio, or more specifically, what portfolio decisions should we be making to protect our portfolio in the current environment?

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] unprecedented. These tariffs were forced on us. It's self-induced. We've never experienced anything like it. And, and again, our memories are short. The, the global shutdown of the entire economy globally in 2020 was self-induced. [00:09:30] The government's decided to shut down everything for a prolonged period of time, uh, leading to the worst recession since the Great Depression, uh, and, and leading to one of the worst economic growth rates since 1946.

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.

Now to, to emotionally stop short-term pain is pressing, perhaps the sell button. Let me sell some stocks and wait till quote unquote. The dust settles and I'll [00:10:15] get back in. It's impossible to time the markets. By the time the dust settles, the prices of stocks will reflected and you'll likely be, as many always do, buying it at much higher prices.

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.

And we imagine, gee, I don't want to go up those stairs again. How long is it gonna take of, and, and it particularly affects people who are getting a little older. So for example. When we advise investors as part of their plan, how to protect their wealth, there are [00:11:00] two things to protect it against. One is the disease of money inflation, and the other is themselves, the investor, and all the emotions that we are programmed with that cause us to make irrational money decisions under uncertainty.

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.

And then to go recover all the way to new highs, past 6,200. That round trip has taken about. 40 months historically. So as long as we [00:11:45] have two to three years living, expenses set aside, out of stock, short term bonds, money markets, really doesn't matter. Something that won't fluctuate so that when we go into a bear market down 20% or more, and when in retirement we can ship our spending to that [00:12:00] short term.

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%.

Inflation rate that we've experienced for the last hundred years, and that's critical. So if someone has, uh, a million dollars and they're spending [00:12:30] 40,000 a year. The advice is if you were prepared, uh, and you're retired, you would have roughly, uh, 80 to 120,000 already set aside. So this decline would not impede your ability to spend during retirement at [00:12:45] all.

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.

So what we've experienced this year might be a little, just slightly more than average occurrence, um, [00:13:15] but because of all the, uh, news media. Sensationalism around it because so many people are unjustifiably in some cases, uh, very much opposed to the current regime and what they're doing. It enhances how we feel about how, [00:13:30] how bad the, the economic outcome is likely to be, and it may in fact get worse.

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.

Our long-term, uh, plan. Uh, I'll finish off by saying no matter how old someone is in their [00:14:15] mind, relative to their planning needs, so if somebody's in their seventies, this happened two years ago, which is why it's on my mind, they said to me, Jonathan, I understand your advice. I. Maybe to have two to three years living expenses so that when we go into these crisis, I'm okay, but I don't have as many [00:14:30] years as your younger clients do.

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?

Of course the answer is no. It takes. Three years [00:15:00] on average to get back, doesn't matter how old you are. So you don't need to have a 20 year life expectancy to deploy this prudent strategy of having two to three years living expenses and having, uh, the bulk of the money in the s instead of the threes.

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.

So hopefully, um, this, this podcast will be helpful to those who are going through, uh, a, a pretty, uh, stressful environment right now with their money and, and the fears they're feeling. But to please [00:15:45] keep in mind, it's critical to maintain the portfolio if someone has to worry about their retirement now, who is retired?

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.

So with that, uh, thanks everybody for listening. You can tune in always, [00:16:15] uh, to crazy wealthy podcast.com on our website, uh, apple and, and all your favorite. Uh, venues, uh, to listen to podcasts.

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] 

Disclaimer: The previous podcast by Fusion Family Wealth, LLC Fusion was intended for general information purposes only. No portion of the podcast serves as the receipt of or is 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 [00:17:00] performance of any specific investment or investment strategy or any non-investment related or planning services, discussion or content will be profitable.

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