• Stephen: Hello, everyone, and welcome to another episode of “The Smart Money Show.” I’m your host, Stephen Rischall, along with my co-host, David Jacobs. And today we’re gonna be talking about what’s going on with Ukraine and Russia, the stock market correction, bear market in the NASDAQ, and the things that you might wanna be considering here with your portfolio. Welcome back. Thanks for tuning in. So let’s cut right to it. Tragic news. It’s shocking, but not necessarily surprising. We saw some wild swings in the market this past week. I mean, what do you make, David, of everything that we see going on right now with the stock market and Ukraine and Russia situation?
• David: Well, I mean, it’s scary, first and foremost. We haven’t had this geopolitical tension in many years, thanks to COVID, and the media’s kind of done reporting COVID, as we’re done listening to it. So they’re really throwing this Russia/Ukraine thing down our throat. And let’s face it, there is an unnecessarily large loss of life in Eastern Europe right now that is very, very sad. A lot of families are struggling and that certainly is tragic. But when you look at what’s actually happened with the stock market and the global economy, it’s really Russia that’s done it to themselves. Their market’s down 30% or 40% in the last couple of weeks. So it really is interesting when you consider what Russia is doing to itself. Here at home, the S&P really has been somewhat unaffected by this conflict. Now, of course, Wednesday night, when we first learned about the invasion, the pre-market numbers were down significantly. And Thursday morning it continued. But by the end of the day Thursday the market had not only fully recovered from its couple of percent drop, but was actually up. And then Friday was a big positive day too. So, similarly, when you look at Europe, which a lot of clients have been talking about their fear of what’s happening in Europe, Europe’s a little bit less affected than we were. Keep in mind, our market was already in correction territory before Russia invaded, and Europe has done a little bit better than us, at least year to a date. So I think the important thing to remember is that this isn’t gonna stop tomorrow. Putin’s game, endgame, whatever you want to call it, is far from known. And we should expect more volatility. And we should expect the media to continue to kind of cram it down our throats. But we’ve expected this volatility. And it wasn’t necessarily because of Russia. As we said in our client event a few weeks ago, we have a saying in California, “You don’t need to know what’s gonna start the fire,” “you just need to know that the brush is dry.” And the investment landscape has had quite a bit of dry brush for a while now, with high valuations, end of the stimulus from the government, and so on and so forth. So we’re keeping a close eye on inflation, interest rates, supply and demand. And I think one interesting thing, Stephen, that I’d like to hear your opinion on is do you think what’s going on in Russia is gonna change the Fed’s approach to interest rates?
• Stephen: Well, they say every action has an equal and opposite reaction, right? So I think, look, my opinion is that I don’t think these recent events between Ukraine and Russia is really going to have much of an effect on what the Fed has likely already decided to do with their rate of change, and how much and how fast they’re gonna increase interest rates. I do think, however, that this gets investors to think differently about the rate of change of interest rate increases. Maybe Wall Street, now, they might have been a bit too aggressive. I heard some expectations before all this were that the Fed would hike at all seven meetings this year. That was never our consensus. I mean, before this invasion, you know, we really felt strongly, and we still feel strongly, that the Fed is likely to raise rates probably four, maybe three, separate times this year. And we still maintain that view. Now, David, just like you said, the S&P 500 was already in correction territory, meaning it was already down by more than 10% from its peak. The NASDAQ, by the way, mostly those tech stocks, tech-heavy, was down in a bear market over 20% since before these recent events in Ukraine and in Russia. So, you know, investors tend to see short term volatility as the enemy. And volatility, it might lead some investors to move money out of the market and to otherwise sit on the sidelines until things calm down. But you have to be careful with that, right? Because although this approach might appear to solve one problem, it certainly can create another.
• David: Exactly. And what we’re talking about is market timing. And as I learned 25, 30 years ago in my finance class 101, you cannot time the market. That’s kind of investing 101. It creates some problems. Number one, you have to make two correct decisions: when to get out, and when to get back in. And by sitting on the sidelines, you’re missing the potential and likely rebound. And even as the market’s coming back, emotionally you start to feel, “Well, yeah, it’s coming back now” “but it’s gonna go back down.” And when it doesn’t, it creates even a bigger problem. So missing the potential, the recovery, in today’s market environment, where interest rates are zero and we have high inflation, you’re also looking at losing to negative real returns, in that inflation of 5/6/7% and a 0% return in the bank, it’s a loser’s game. So it’s really time to, it’s time in the market, not timing the market, that matters over time.
• Stephen: Exactly. And you know, this chart we’re showing on the screen is just showing, you know, intra-year declines versus calendar year returns. In other words, it’s actually quite common that during any given year, that’s what you’re seeing in the yellow, that the market could take quite a hit but then surprisingly, in some cases, by the end of the year, the market, actually in most cases, has ended higher. In some cases it ended the year lower, still, but clearly has tracked, you know, tracked a lot of that decline back. And that’s really important because while, like we said, stocks have sometimes experienced this extreme volatility during short term periods, we believe that investors who remain committed to their long term investment plan, they will be continued to be rewarded over the longer periods. You know, I always wonder, right, imagine if you had invested your money right before the financial crisis, like at the peak there in 2007, and maybe some people feel like that today, right, the market’s been really high. So, imagine if you had invested your money at the peak of the market 2007, just before the crisis, and did nothing, you did the smart thing and stuck to your long term game plan. Well, we’re sharing a chart right now that shows the cumulative returns over the long term. And if you just stuck to your game plan, you stuck to a diversified portfolio. You see the dark blue is stocks. So the stock market obviously did the best out of all these different asset classes, real estate, oil, gold, inflation, it’s all here on the chart. If you stuck to that long term game plan, you would’ve ended up much, much better than had you tried to time the market and possibly made a very, very big mistake.
• David: The old Wall Street saying is, “Buy low, sell high,” even though the average investor emotionally tends to do the exact opposite. It’s very hard to do. And Warren Buffett has made a career of doing just that. We’ve shared this chart many times in the past. It’s a chart that shows the power of market-timing. And over the past 20 years, as Stephen mentioned, the S&P 500, the US market, has averaged almost 10% per year. But if you missed just the 10 best days in that period, the 10 best days over 20 years, your average would be roughly half as much. And if you missed the 20 best days, your average would be almost zero. So over the long term, again, it’s keeping with your financial plan that’s most important, considering your goals and making sure that you’re putting your best foot forward for investment returns down the road.
• Stephen: Precisely. So while certainly, like we said earlier, the events right now in Ukraine and with Russia, it’s very unwelcome news, very tragic news. Our prayers are with them. But the reality is that doesn’t really affect most of our purchase decisions and financial decisions here at home today. So, keeping a close eye on inflation and interest rates, most importantly, making sure that the investment decisions that you’re making today are aligned with your long term game plan. Now, if something’s changed recently in your financial life, maybe it’s time to revisit your allocation, the balance of risk and reward in your portfolio. And let’s definitely have a conversation about that. But sticking to your long term game plan, your investment plan, and aligning that with your financial plan, that’s usually the answer and the key to long term success. So look, if you learned something new in this video, please feel free to share it with your friends, family, loved ones. And we hope you tune in next time and join us here on “The Smart Money Show.”