Fix It Friday Ep. 37 - When Bear Markets Arrive, Change Spending Strategy, Not Portfolio Strategy

• Avoid making investment decisions based on short-term headlines or predictions that cannot be made reliably.

• During bear markets, retirees may be able to draw from short-term bond reserves instead of selling stocks at depressed prices.

• Inflation can erode purchasing power over time, making long-term growth an important consideration.

• Successful investing is about building a plan you can stick with, even when markets become uncertain.

Speaker 1 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 as 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 services and fees is available upon request or at www.fusionfamilywealth.com.

Jonathan Blau 00:18

So welcome to another episode of Fix It Friday. Today's episode was inspired by the conventional wisdom approach to investment advice backed by the talking heads who go on CNBC. Will typically, during market declines and periods of greater perceived uncertainty, they will tell investors what they should be doing inside the portfolio in response to whatever's creating the perceived uncertainty today. So that's, that's what inspired today's podcast, because as a behavioral investment counselor, we never tell people to change the portfolio response to short-term current events because the portfolio is designed to work over very long periods of compounding, and so we don't want to interfere with that compounding.What we do is we tell our investors, we do change something. You need to change something, particularly if you're in the distribution or retirement phase of your portfolio when we have down markets and greater periods of uncertainty. What you need to change is not your investment strategy, but your spending strategy. So when the markets are declining in response to the perceived uncertainty and stock prices are way down, we don't want to continue selling off our long-term capital gain, uh, stocks to meet our living expenses. We want to switch the spending strategy to our short-term two or three-year pool that I always advise investors should have in bonds or money markets, and that, that protects us from having to sell stocks during deep declines. It also allows us to always have most of our investment portfolio exposed to protecting us from the greatest threat to our money, inflation, which is exposed through stocks, right?By being able to switch to that short-term pool. So that's what inspired today's podcast.

Speaker 3 02:04

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 making consistently rational financial decisions under conditions of uncertainty.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.

Jonathan Blau 02:38

One of the most important questions in investing is this: What problem are we really trying to solve? Answer to that question often determines whether an advisor takes a portfolio-centric approach or a behavior-centric approach. While those approaches may sound similar, they lead to very different decisions and ultimately very different potential outcomes. The portfolio-centric approach goes something like this. It starts with the assumption that the primary risk investors face is volatility, and I like to say when the perception of markets becomes more uncertain, the instinct is to change something, reduce stocks, add defensive positions, more bonds, shift sectors, maybe from technology to, uh, utilities, replace managers, make tactical asset allocation moves. These are moves that we, we make within our portfolio i- instead of in response to our needs changing, in response to the current environment changing, and those are always among the most dangerous moves to make because we interfere with a portfolio that's designed to have the highest probability of meeting our long-term goals by leaving it as is to do what it needs to do, not by interfering with it because of short-term dislocations. The underlying belief is that if we can correctly predict what's coming next, we can improve our outcomes. The problem is that these decisions depend on variables that can neither be controlled, uh, nor forecast with any meaningful consistency. No one reliably knows what the economy, interest rates, markets, sectors, or investment managers are about to do next. Yet investors are often encouraged to make important decisions based on exactly those predictions. The result is frequently more trading, more taxes, more costs, and interruption of compounding that often impairs their ability to reach their long-term goals in the first place.

Jonathan Blau 04:27

The behavior-centric approach sounds something a little different. It starts with, with a different premise, and what I like to do here is quote Leonardo da Vinci with one of my favorite of his quotes, "Simplicity is the ultimate sophistication." So instead of trying to sound smart about predicting the future, we focus on a handful of enduring principles. For more than a century, stocks have been the primary driver of long-term wealth creation, or at least one of the primary drivers of long-term wealth creation after inflation. That's why behavior-centric investment begins by asking, "How much stock exposure do we need to achieve our long-term goals mi-- while maintaining the discipline to stay invested?" The objective isn't to eliminate or even reduce volatility. The objective is to prevent volatility from causing us to abandon a sound plan. The biggest difference appears during bear markets. This is where the two approaches, behavioral-centric and portfolio-centric, diverge most meaningfully. When markets decline sharply, portfolio-centric advisors often change the portfolio strategy. Behavior-centric advisors change the spending strategy. That's a profound difference.

Jonathan Blau 05:34

If a retiree has two to three years of anticipated spending needs already set aside in high-quality short-term bonds, there's no immediate need to sell stocks during a bear market. Instead, spending comes from the bond reserve. The stocks remain invested. The long-term investment strategy remains intact. The compounding process also remains intact. In other words, we don't change the engine because of the storm.We simply change which fuel tank we're drawing from to fuel the engine. Portfolio-centric investing asks, how should we change the portfolio because the market changed? Behavior-centric investing asks, how can we avoid changing the portfolio because the market changed? Markets are unpredictable. Spending needs aren't. So what risk are we really solving for?Portfolio-centric investing treats volatility as the primary risk. Behavior-centric investing treats inflation as the primary risk. Volatility is noisy. Inflation is silent. Volatility is uncomfortable, while inflation is dangerous. A market decline may create temporary anxiety, but inflation can, and often does, create permanent erosion of our purchasing power of each dollar and reduces a family's future standard of living potentially. One is emotional, the other is mathematical, and if your portfolio fails to outpace inflation over decades, achieving your financial goals becomes increasingly difficult, regardless of how comfortable the journey felt along the way. So what's the real enemy? After decades of working with investors, I've come to believe that markets rarely destroy wealth. Investor behavior does. Fear causes investors to sell. Envy and greed causes investors to chase performance. Predictions cause investors to have abandoned sound plans, and the greatest risk to long-term success is not volatility itself. It's how investors respond to volatility, especially when the response is leading them to change their long-term investment portfolio.That's why behavioral investment counseling isn't about predicting the future. It's about building a plan that makes prediction unnecessary in the first place.

Jonathan Blau 07:41

So what's the fix? Most advisors respond to market declines by changing the portfolio strategy. Behavioral advisors respond by changing the spending strategy. That's the distinction. If you've planned ahead and set aside a few years of anticipated spending needs in short-term fixed income, a bear market doesn't require selling stocks. It simply requires spending from a different source. The long-term strategy stays intact, the ownership of productive businesses stays intact, and the compounding that's needed to achieve our goals stays intact. Because successful investing is never about predicting the next bear market. It's about building a plan that does not require us to react to the next bear market, and that's why when bear markets arrive, we change spending strategy, never portfolio strategy.I hope you enjoyed this Fix It Friday. You can catch us on fusionfamilywealth.com, crazywealthypodcast.com, as well as all of your favorite podcast venues. Have a great fall, and see you next time.

Speaker 3 08:46

Thank you for tuning in to another episode of the Crazy Wealthy Podcast. For more insights, resources, and to sign up for our newsletter, visit crazywealthypodcast.com. Until then, stay crazy wealthy.

Speaker 1 09:06

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 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 services, discussion, or content will be profitable, be suitable for your portfolio or individual situation. Neither Fusion's investment advisor registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Fusion is engaged, or continues to be engaged, to provide investment advisory services. Fusion is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client, or prospective client, as a guarantee that he or she will 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