Best Financial Questions 2019

Tim Domino:

Hello, I'm Tim Domino, director of wealth planning here at Sanderson Wealth Management. I'm joined by my colleague, Justin Sanderson, our vice president and today we're talking about some of the best questions that we've got or at least the most persistent questions we've got over the past year. And I know there's one question in particular that we've certainly gotten a lot recently pertaining to cash and when is a time to sell out of the market.

We all know that the market's at a relative all time high and a lot of people saw some great returns last year and they're wondering is it time to lock in those returns and go to cash and wait for this recession that everybody says is coming. Have you been getting a lot of those questions this year, Justin?

Justin Sanderson:

Yeah, I've been getting several iterations of basically the same question of should I be selling assets to pay for these things that I want to buy? I've got a bunch of cash on the sidelines but the market's too high, I shouldn't buy today. Or, Hey, my portfolio has really grown, let's take the money off the table and enjoy this sort of thing. And we've been getting this question really since I started doing this over the past 10 years, which has been a great period in the market. And we also always offer this, Hey, they're really asking should we time the market?

Justin:

Hey Justin, Tim, should we try and time to market this time? I know you've told us in the past and during our onboarding that we shouldn't try to time the market, but should we this time because things are different? And our standard answer is no, we don't try to time the market because we don't know when it's going to go up, we don't know when it's going to go down. We can kind of gauge things over the long run. But in short, you really got to be right twice and it's near impossible. You've got to sell out at the right time and you've got to buy in. And if you are wrong, which most of the time tactical asset allocators aren't correct, it can be devastating to your long-term financial plans.

Tim:

Given that we are at a relative all-time high in the market and we have all this uncertainty on the table in the global markets right now, we can read the list of headlines, but there's certainly plentiful and there's bound to be more coming. Is it time to really take a different look at things this time? History is what it was, but we're a very forward looking investment firm and should our efforts be focused on and going forward here and understanding how that's going to impact things and is it really time to do something different?

Justin:

In answering these questions here today, one of the things I wanted to do is take a step back and look back at history before we start to project further. So I want to take a meaningful amount of time. We're talking about the last 10 years, but I've stepped back all the way to the 1980s so I can look over the past 40 years in the market. Really, how's the S&P 500 looked and what is the shape of that? And that's what you see here on this graph. And here you can look at over the past four decades really what is the shape of the S&P 500 returns looked and you can see it's generally been very nicely up. There are a few notable periods in there of some meaningful downturns. You can see the first long one was the tech bubble in 9-11 kind of piling on top of each other.

Justin:

Also, the ethics crisis for those of us that remember and Ron and Adelphia and the Rigas family, I think they're still in prison, those sort of things. And really it just kind of ran up from there once we got over those huddles all the way through 2007. And then we saw the financial crisis and really the mortgage contagion effect the whole world and saw a big, big pull-down basically back to those 2000 figures.

Justin:

But if you look at the graph, you can see it went down faster, but it also came back much, much faster. Let's fast forward to 2018, in the fourth quarter of 2018 we saw a dramatic sell off in the market over an 11 week period. Intraday, it went down actually 20% so a true correction and the timing of it just worked out that where by the time we were actually opening the statements, they were certainly delivered to you early in January, but by the time you actually opened your mail, most of that money was already back.

Justin:

And so taking a look, it seems like we've started to react faster both in the up, and the down and since that correction the market has continued up another 30% or thereabouts to the all-time high that you're talking about.

Tim:

Yeah, I'm curious if you can see the general slope of that graph. It's obviously there's some dips here and there, but the general slope is obviously up over that time period. So how often do we hit all-time highs in the market? Is it, I mean we feel like we're at an all-time high now, but for every... there's hefty prior all the time highs as well.

Justin:

I wish I had a nickel for every time that we were at an all-time high, that's for sure. Well, let's take a look. So I did this animation here on the graph. They really show us that Hey, each of these copper bars going across is a day where we are the all-time high. And you can look, there's a lot there going across. So while we say, Hey, I'm inclined emotionally and behaviorally to want to sell because we're at an all-time high and want to lock in those gains.

Justin:

Well, you're just missing out perhaps on the next all-time high. And if we look at it by a decade by decade basis in the 80s we hit all-time highs 56 times and now some of the data in the 80s actually monthly. So it's probably far more frequent than that. In the 90s, 355 times, even the 2000s which were relatively ugly period of time here in the US market, we still hit highs 52 different times. In the 2010s, great decade up 316 times and we're already up to seven times so far in the 2020s. My bet is that 2020 number isn't going to end at seven and we're going to continue on here over the next 10 years.

Tim:

Absolutely. So it's great looking back at that S&P 500 performance over how many ever decades you went back. But I think a lot of things we get from clients or questions from clients or aren't things different this time? We're in a whole new world, a whole new set of circumstances. There's new challenges, challenges we haven't seen before. We have viruses we haven't seen before, aren't things different this time?

Justin:

The truth of the matter is that they always feel different, but there's a reason history is a required course and that's because a lot of these things will echo to things we've looked at in the past. You can think about coronavirus today of, yes, this is certainly different. China's different than it was when SARS was out. There's more global trade and that sort of thing. However, there were getting a lot of the same feelings we had back then.

Justin:

And so there's valid concerns and certainly corona could be more damaging than we thought, but when you look at the market's reaction, it was immediately very negative. We saw minus 5% or greater in the emerging markets the first week it came out and it was really revealed of how contagious it really was. But since then we've basically made all that money back because it's been found to be sort of controllable and that sort of thing.

Justin:

So I think short-term reactions can certainly be very negative. But generally what we've need to do is go back to fundamentals and say, Hey, what are we really doing here as equity market investors? Because that's what we talking about is being invested in the global equity markets and we're buying into the success and failure of these global companies that are out there producing goods and services and banking on the expansion of global economy.

Justin:

And I think that's what we really should focus on for the next 10 years of how successful is the economy going to be. Because I trust that these big public companies with smart boards are going to be run very well and should continue to capitalize on the economic activity in the world. So here we're looking at the GDP across the whole world over the next 10 years.

Justin:

In the middle there is the blue line and you see we're expecting about cumulative growth of about 38% over the next decade. That's pretty nice growth annualized three plus percent. Sort of what we've been experiencing over the past 10 and that's been good. The interesting story will be both the developed world they're on the bottom and the orange and the developing world or the emerging markets in the gray bar on top are going to continue moving forward. And that's the interesting thing. And so even in the US and developing world, we're anticipated to continue growing at about 2% per year. Whereas in the emerging markets that they think are going to continue to outpace and really be the driver of economic growth throughout the world at almost a 60% expansion there on economies over the next 10 years.

Tim:

Interesting. Well, you talked about China a little bit before and certainly China's a integral part of this whole conversation and really how has the trade war and the trade differences with China really impacted things going backwards and should it impact our decisions going forwards of whether or not the time in the market, should we wait until this stuff gets taken care of? Should we wait until resolution? Will there be resolution? What are your thoughts on that?

Justin:

Yeah, that's an interesting one. The trade war and the impacts in it and whether they're material or not I think is open for debate and interpretation. And I'm certainly not an expert enough to really, and I don't think anybody is to really know what the long-term impact will be. But I think one of the things to step back in this, to think of where China is today.

Justin:

They've got basically $9,000, US dollars GDP per capita there right now. And that's enough to start really becoming more of a consumer economy than a supplier economy that they've had been having in the past. Here in the US we're very much a consumer economy. Things like 70% of our GDP right now and in China we're going to see that too. So what does that mean for China though, is perhaps they're not going to experience the same level of growth they have in the past.

Justin:

Perhaps their growth will look more developed than it is developing, but we'll see. So what they've said over there is they're still going to be the driving developing country with about 60% returns or 60% expansion of their GDP over the next 10 years. Where the US right on target with the rest of the developing world. Also, we are by far the biggest developed economy in the world of about 2% a year, which has been great for investors.

Justin:

So I know 2% might not get people excited, but it's been really, really great for wealth creation as you know anybody that's been taking a look at their portfolio over the past 10 years. One of the things I want to bring up though is I think there's an interesting story here too. There's about 1.3 billion people in China, but there's also 1.3 billion people in India and India doesn't nearly get the headlines.

Justin:

China's definitely been the great story over the 2000s and 2010s, but I think the importance of India is going to continue to grow here and really the OECD is in their economists are on the same page. So taking a look at India here, in the top bar there and we can see their growth trouncing that of China.

Tim:

Wow. It's incredible.

Justin:

Now, that is on a smaller base, GDP per capita at roughly the same amount of folks. Perhaps there might be more Indians than Chinese relatively soon. But we're seeing near a 9% annualized growth over there and basically a doubling of the size of their economy. So there are about 2000 US dollars per capita today. We'll probably see them somewhere around four plus in the future. And I think that's a really interesting one. Don't know exactly what to do with the information, but I think it's an encouraging thing of seeing, Hey, there's a lot of developing going on across the world that even if growth here in the US is a little slower than some people would like or we were use to in the 80s and 90s, there's still a lot of good stories out in the rest of the world and all companies should benefit from that because really we're investing in big multinationals.

Tim:

So Justin, it's fascinating to see India in this picture and really how you've painted the global markets as a whole. I think it provides a lot of optimism, a lot of sense of growth on the horizon and things. So how should investors think about positioning their portfolios to take advantage of this growth and to really capture all this opportunity that you say is out there?

Justin:

I think this really goes back to the people's, that initial question of timing the market and that sort of thing. And what should people do in light of all of this stuff that we're talking about if we've got great growth prospects for the future. But the big part is to make sure you're in the right portfolio for your willingness to take risk.

Justin:

And I think that's something that could have gotten out of whack over the past decade if you've been on autopilot somewhat because the equity market has done so well in the bond market has also done well, but not nearly as well. So that's one thing we want to keep in mind. And maybe if you're feeling this question of, Hey, should I tie in the market? Should I sell some of my winners rebalance? Let's go ahead and reassess your willingness to take risks.

Justin:

And that's something we can do with you. We've got a nice new tool we've been using over the past year or so. And I think that's a really important takeaway from this is if you're feeling uncomfortable or let's make sure you're in the right type of portfolio and have the appropriate amount of risk for your willingness.

Tim Domino:

Yeah, certainly making sure that your risk tolerance is in alignment is absolutely important. And really, like you said, you could've gotten blinds, but over the past decade when things have been relatively good across the board. So is there anything else that I should be doing besides just risk assessment though?

Justin:

I think one of the things to keep in mind too is with this timing question is it's really a short-term time horizon sort of question of... But your portfolio is really, if you're sitting there watching this, you're likely amassing more wealth than is going to last for another generation or more. Or perhaps you're really focused on retirement spending and should be not just focused on that retirement date, but thinking about longevity and how long retirement might actually be for you.

Justin:

Here's a slide I like to bring up to folks that may be on the easy about current market conditions. Here we're taking a look at the probability of gaining money in the stock market over different time periods and I looked very short, so we started on a daily basis, 52% of the time you're going to make money on daily basis. Well, that's a crap shoot and not anything anybody should be betting on, that's for sure on a daily basis.

Justin:

But as you stretch this time out over a month, you increase a little bit. Over a quarter, you increase even more. You stretch it out to a year, which is still relatively short. We think you should always be making decisions over a five to seven year time horizon, 82% of the time over the past 40 years you would make money on an annual basis. So I think that's one thing people should keep in mind is their time horizon. It really what the true time horizon, their money in their portfolio is impairing that with their risk, willingness to take risks.

Tim:

Well, this is great Justin, thank you so much. I think it was fascinating to see kind of the look back at things and really have a response to what a question that we hear from clients all the time. And I'll, if we had a new all-time high tomorrow, we'll probably get the same question tomorrow, but I think a lot of what you went through gives at least clients and people some comfort in knowing that they're not necessarily missing out on something.

Tim:

That they need to keep that long-term focus going forward, understand history and make sure their risk tolerance, their portfolios are positioned going forward to kind of take that study right up.

Justin:

And I'll just leave with one closing thought here of we talked about analyzing your willingness to take risk, working with somebody like us to also assess your ability to take risk, selecting that appropriate asset allocation target. And the last step of that is rebalancing. And this is one of the important things that we set this allocation is to be disciplined on the rebalance.

Justin:

And right now a lot of people, I've found this in practice have been hesitant to rebalance. What we mean there is to sell your winners and buy the losers and keep your portfolio intact in your portfolio allocation intact or close to those targets. So set a reasonable tolerance band, talk to us. I think it's both an art and a science. I think that's a really important takeaway from this is to really rebalance when you're getting these feelings and uneasiness or you want to take some of the success off the table. And I think that's a key for folks.

Tim:

Great. Well, thank you all for joining us today on our discussion on market timing. If you have a question about the time in the market tomorrow, you can always refer to this video or call Justin or another member of our team. But we hope you found everything informative and enjoyable and we look forward to joining you for future segments.