Episode #37 - Market Timing
27:23
Todd Pisarczyk & Taylor Vilhauer
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TRANSCRIPT
Welcome everybody to the Momentous Wealth Podcast, where we discuss current issues in the world of finance and break them down into understandable terms to further your education. Momentous Wealth Management is a financial planning and investment management firm based in Washington. We've been serving clients for more than 20 years, and on this show we take that experience and put it to the microphone in an effort to educate investors in the complex world of finance and financial markets. Welcome everybody to the Momentous Wealth Podcast. This is Todd Pisarczyk, and I'm here today with my good friend and fellow advisor at the firm, Taylor Vilhauer. How's it going, everyone? Yeah, we're, we're excited today to talk about this subject. So today we're talking about a behavioral topic and I think, you know, Taylor and I spend a lot of our days working in numbers and calculations and stuff like that, but both of us, one of our favorite topics is this idea around behavioral finance. And we've done episodes on this before, but today we have some pretty interesting real life statistics on why this is important. And it really, what it has to do with is investor behavior and how oftentimes the behaviors that we involve ourselves in as investors that are actually causing us to lose money or not make as much money as maybe we could as as investors. So here's why I think this is an important topic now.
So, the market this year has been pretty crazy. We've had a lot of ups and downs this year, and I think that as we move forward, and this, you know, obviously past performance is no guarantee of future results. You know, we always have that disclaimer on the podcast here, but I think that this environment we're moving into, into the future could be a little different than what we've been used to over the last 12 to 13 years. And what I mean by that is, if we go back to the global financial crisis, so back in 2008, the Fed lowered interest rates to 0%. And we've been in this environment of 0% interest rates. And what a lot of people don't realize is that the stock market from, from the time that we recovered from the global financial crisis, all the way until Covid happened, was actually we, we had volatility, but the amount of volatility was quite a bit less than average. And I think we're, we're going to be returning to a period where markets are gonna look a little bit more normal as compared to history. Meaning it's likely that we could experience some, some more volatility and ups and downs than what we've been used to over the last 12 to 13 years. And for a lot of people listening to that podcast, the last 12 or 13 years might really be most, if not all, of the experience they have as investors.
But I think if we go back to the time, like my, I started my career in 1999, you know, markets were actually quite a bit more up and down. We, we experienced corrections more often, corrections when the markets fall 10% or more. We experienced bare markets. In fact, on average, we, we tend to have a bear market about every four to five years. But we really didn't have much of that during that, that time period of 0% interest rates. And, you know, the Fed, as we know, has raised interest rates quite a bit. And, and I think that this environment we're going into could look a a little bit more like the historical norm, which is a little bit more volatility. That doesn't necessarily mean returns are lower, it just could be with a little bit more ups and downs. So I think as investors, it's gonna be more important than ever for us to really buy into this long-term approach when we're investing in stocks. And, and I wanted to have Taylor here, 'cause he actually in the office, he sent, sent me an article, I don't know, several weeks ago about this topic. And I was like, man, that would be an awesome podcast. So I asked him to come on today and talk about it. So yeah, it's really neat. The article that you're referencing that I'd seen a couple times, references how financial advisors can deliver value to their clients.
And Morningstar actually did a study that showed financial advisors can, can deliver additional 1.5590000000000002% to per year four retirees, and up to or over 3% or more according to a Vanguard and Investnet study, which to me was crazy, right? Yeah, because that's, it's a lot, it's a lot more than a half percent. Yeah. Yeah. And we see it and we know because we do it every day, how important the behavioral coaching, behavioral finance aspect, we'll talk about this more, but rebalancing, asset allocation, all this, all those things that we do, we know how important that is. But it was really, really fascinating to see it put to paper and actual percentages related to that piece. Yeah, I I thought it was most impressive that Vanguard was able to get that through complaints. Yeah, for sure. Good job, Vanguard. And yes, we're not gonna go into the details of how they came up with those numbers, but they did. And it obviously, there's, there's a wide range between the study that Morningstar did at 1.5899999999999999% and over 3% with Vanguard and Investnet. Either way, whatever those numbers are, it just shows us how important that behavioral piece is. Yeah. Especially after what you were talking about with going into more normalized markets of a little more turbulence, bear markets a little more, you know, apt for recessions, which is totally normal, but we've been pretty spoiled the last 10 or so years. Yeah.
So you had a stat tailor that was about Peter Lynch. Right. And again, this is, this is where I think the rubber hits the road and why this is a really, really important topic to talk about right now. But Peter Lynch was, he used to run a fund called the Fidelity Magellan Fund. Yes. And this was also very, very interesting for a financial nerd like myself. A and you included Peter Lynch very well-known legendary investor from 1977 to 1990, ran that fund under his management and it averaged an annual return of 29%. Wow. I wish we could get that today. 29% per year from win 1977. From 1977 to 1990. Wow. Okay. So you would assume that all you had to do was, was participate with Lynch and you would earn those, those same returns. Right. But according to a study that Fidelity Investments did, the average fund investor in that fund lost money during that time period. Oh my gosh. So, so break that down. So, okay, so really this is what's really vital to understand. If you're listening to this podcast, that mutual fund, if you would've just put money in in 1977 and went to sleep until 1990 and woke up, you would've averaged 29% per year. Yep. Annual return per year, 1977 and 1990. But the average investor lost money. Yes. W why, like, how is that, how does that work?
I mean, I think, I think that it gets down to our human nature and human behavior. So, so people investing in the fund, even though the fund was doing really well, they weren't, very few people just put their money in and wrote it out. They were what, buying in at the wrong time and selling out at the wrong, I mean, is that, is that effectively what's happening there? Yeah, I mean, and it goes back to this whole thought around the market's. Worst days tend to be followed by its best days. Carl Richards one of our favorite, favorite folks in our industry to listen to. He's a, he draws with a Sharpie, one of my favorite pieces of art he's ever done. And I tell a lot of my clients this, I, I think about it, we have it up in our kitchen, actually. Yeah, yeah. Imagine a roller coaster. And on the, to, to, to clarify the kitchen in the office. The kitchen in the office, sorry, Taylor doesn't have that in his kitchen at home. No. Think, and his wife and kids, maybe I will, I'd like it in my office as well. But imagine a, a, a roller coaster going up and down, like, like mountains and basically at the, at the top of one of those peaks, it says greed by, and at the bottom it says fear sell. And on the top of the next one, it says, continue until broke.
And I think that if you really, if you really look at it, it's, it's psychology more than anything. It's human nature that that's what we tend to do. And that's why our job and even having this conversation in the first place makes us realize how important it is to be convicted in our philosophies and understand that human nature aspect. Yeah, I mean, it's, it's, we're seeing this happen. I'm, I'm starting to see this happen now with clients and, and, and a lot of these podcast episodes are born from just experiences we're having at the time with clients. And, and I'm, I'm starting to see that unfold quite a bit now, where, you know, we have investors, for example, that, you know, maybe have been investing in the market for many years, you know, maybe with our firm, another firm, whatever. And last year was a down year, you know, 2002, the market was down. So a lot of investors lost money. And the number of people that, you know, after a year, like last year say, oh man, I'm losing money. Right? It's like, well, okay, yeah, you, you lost money in 2002. But if you're someone who's had an investment portfolio for the last five to 10 years, you're more than likely way up. Right? So people tend to look at what happened most recently and, and just feel like, okay, I had a bad month, so I'm down, I'm losing money.
It's like, no, you're not losing money. It's like, if you invest $10,000 and that $10,000 grows to 20,000 and then you have a bad month, so your 20,000 shrinks to 18,000, a lot of people are like, I lost $2,000. Right? And it's like, no, you made eight. You, you started with 10 and now you have 18,000. Right. And had you have not invested, you didn't never had the 18,000. But that's, that's the way a lot of investors look at it. So in reading an article, so Forbes Magazine did an article about this Peter Lynch story as well. And, and they, you know, according to Forbes, a lot of the reason that these investors did not make money in the Magellan Fund, and this Fidelity Magellan fund under Peter Lynch's management was, is widely considered to be the most successful fund of all time. I mean, 29% per year for, you know, for that period of time is incredible. 23 years. Yeah. But the average investor lost money. And the reason is 'cause they were timing in and out of the fund. So the fund would have a really good month, they would buy in, and then the fund would have a bad month. And then it's like, oh, this thing stinks. I wanna, I wanna get out. Or, you know, oftentimes I'll, you know, we'll, we'll, we'll have, you know, Taylor, you do a lot of 401k plans at the firm.
I'll bet you have a lot of conversations with people that, you know, they, they pick the allocation of their 401k based on, you know, they look at the list of the funds and the performance of the funds over the last year, and they're like, oh, that one was up 30%. That's the best one. So I'll put all my money there. I don't wanna buy that fund that's down and losing money. It's like, well, as we know, as investors buy low and sell high, right? I mean, that's how you make money. But I think our perception gets to be so short term and it prevents us from making money. And the real money is made in the long term by just, you know, investing, having a plan, sticking to it. We're gonna talk about, you know, kind of some, some best tips around that. But it's the boring part. Yeah. Yeah. And, and just, again, I just, with with, with the way the markets have been over the last year or two, I just, and, and again, the way it could be moving forward, if we get into a more historically average type environment where markets are more volatile, it's gonna be more important for investors to really have this long-term philosophy and just be able to ride out the bumps. And also for us to make sure that we're educating well around the fact that that is normal. Yeah.
I actually looked at a, the stat from 2023 at the time that I looked at it, there had been 215 days so far in the year, I forget what specific date that was, but data track noted that there had been 113 days and 102 down days and so far in the year. So if you really think about that, it's crazy, right? Like there's, there's no consistency. We don't know if there was 20 in a row up, 10 down, five up, but a good guess would, you know, we can make the assumption that it was all over the board. Yeah. That being said, in those 215 days, the s and p 500 was up 14%. Right. Wow. And a majority of that came in just eight of those days. Whoa. So if you missed eight days, you basically lost all your return. Big difference. Yeah. Yeah. And we, we see those stats all the time, and it's very fascinating to look at and it's, it's, it's so interesting. It, it all goes back to that long-term perspective. Yeah. So I think, I think at the end of the day here, what we're trying to say is that, that it's tough to time the market, right. And I think that if you look at that Fidelity Magellan fund under Peter Lynch's care, you know, Peter Lynch is one of the most famous long-term investors.
You know, Warren Buffet, all, all these really, really, really successful investors talk about long-term investing and, you know, buying companies, holding 'em for the long-term. And, and typically when we have a perspective that's counter to that where we try to time the market, that's just really hard to do, right? I mean, very few people have been able to successfully time the market over, over any period of time. Very few fund managers. Yeah. Yeah. So, so market timing, you know, if it's like, why did that happen? It, it, it generally happens 'cause people, people trying to time the market, which is just, you know, and as we both know, it's time in, not time in. I haven't heard that one in a while. Yeah. I don't know if we both that No, I haven't actually. I forgot about that time in the market, not timing the market. I love it. So, so those are the reasons why we, we see investors basically shooting themselves in the foot, for lack of a better term when it comes to investing, trying to time the market. So Taylor, what, what tips would you give people on what they should do? It's like, okay, well if a market timing doesn't work, what does work?
Well, I think focusing on what we can control, number one, and with what we do specifically and a lot of others in our industry is we focus on the asset allocation, the risk tolerance, having a plan, what are the goals for that money, right? Fees, taxes. And also, one other thing that's really interesting that I love to explain to clients is rebalancing. So we talk about all this, don't wanna time long term, but there is something, you know Yeah. That's, that's really interesting that we're doing behind the scenes that maybe not everyone would see unless they really, you know Yeah. Look at their monthly statements as it relates to the activity within the accounts. Yeah. So long-term investing doesn't mean do nothing. No. Right. We're, what we're saying here is it's hard to time the market, but there are things, very important things that, that you can be doing as an investor. And I think that's a really good point you make Taylor about focusing on what you can control. I really like that. I don't know if many of you know, but in addition to my day job as a financial advisor, I, I coach a high school baseball team here in town in the spring and you know, we talk to our players all the time about that, you know, just focusing on what they can control.
You know, you can control how many reps you take and how much you work out and that kind of stuff. And especially in a sport like baseball, it, it, it's, it's funny to me how, how similar it is to investing because, you know, you can't control if the pitcher on the mound that you're facing as a hitter is just dealing that day. You know, or if the umpire is not good that day, all you can do is get up there and have a good approach, take good at bats and try to hit the ball hard. Right? And, and you know, especially baseball, you sometimes you're unlucky and you hit four line drives in a game, but all four of 'em go right to somebody, so you're Oh, for four, right? It's kind of the same thing with investing. Is there, there are things you can control that are gonna increase your success rate, those things that Taylor mentioned. And I think that, that that's what you can do. And, and back to that, that survey, in fact we, we did a podcast, we actually had a representative from Vanguard on this podcast talking about these things. So check out that episode if you want more information. But if we look at these things that you can control expenses, you know, we know that if we buy investments that cost less, that we're gonna make more money, right?
If we control taxes, if we do rebalancing, like Taylor said, you wanna explain what rebalancing is really quick, just in case somebody doesn't I was really hoping you would do that. I, I, I obviously know what rebalancing is, but I, I always just feel like there should be a more clever way to explain it. I mean, essentially it's, it's buying or selling of assets within a portfolio to move back to the desired allocation. Ah, very well. But in addition to that, the fun part is it's also an attempt to sell high and buy a low. Yes. That is key. 'cause the thing is, if you're rebalancing, you're effectively what you're forcing yourself to sell assets that are high and forcing yourself, you have to put that money somewhere. So you're forcing yourself to buy assets that are low. Well, and for us, because we do it every day, it makes total sense. But once again, human nature says, why would I sell something that's gone up or buy something that's gone down? Yeah. And, and I thought this was staggering. And again, I'm just gonna, we're quoting Vanguard. So Vanguard, this is according to Vanguard's advisor Alpha study that they did. And it's, it's very fascinating 'cause 'cause they, they say when you implement all those things, right? So you have the right asset allocation, you're controlling expenses, you're doing rebalancing, which is key. You're not trying to time the market, you put assets.
So asset location is something you can control. So there's all these different types of accounts out there. You have IRAs, you have Roth IRAs, 4 0 1 Ks, all those kind of things. Making sure you have the right assets in the right location is key. That's something you can control and you can control strategies around spending. But if Vanguard says in the studies, if you do all those things, you can increase your return of up to 3%. And, and in fact, in their exact language it says up to or even in excess of 3% in net after expense returns per year by doing those things. And that's, that's huge. 'cause in this day and age, if you look at any investment vehicles out there, you look at mutual funds, I mean, you're hard pressed to find a manager that's gonna beat a particular index by 3% per year. Net after expenses over a long period of time. Consistently at least. Yeah. So by doing those things that you can control, again, according to Vanguard's survey, like, or study like that right there, you can add a significant amount of return to your portfolio. And so, you know, we believe as investors do that time in the market is, you know, it's, it's been shown over the long term that it's just really, really, really hard to do. And if you're somebody who's good at it, great.
I, frankly, I don't know if I've ever met anyone that's been, it's, it's kinda like, and it's really like sports betting in a way, right? Like I know people that have won, won money betting on sports, but you only hear about it when they win. Well, and I can imagine that sports betting would be very emotional too. Just like your money. Yeah. Yeah. I think that those are the things that, that we're looking at as we, as we move into this environment of potential, a little bit more ups and downs. And I think that rebalancing thing is key Taylor. 'cause with, with more volatility brings a lot more opportunity to profit through rebalancing. So, and I think the thing with rebalancing, if you think about it, yes, we're doing this activity within the portfolios to try and add additional value, but going back to the human nature aspect, what the average human wants to do is just completely jump out of the plane. Yeah. Right. Completely stop the car. However you wanna, however you wanna say that. Right. Stop it. We're actually trying to keep it progressing. Right. And take advantage of those opportunities. Exactly. Love it. Well, any other tips you have for our investors? What, what we have the rare opportunity to have Taylor on the podcast here.
I mean, I think it's just important, especially for our clients listening today to, to call us, whether it's me, Todd, whoever your advisor is, Nick or Linda. Don't be afraid to call and say, Hey, can you, can you tell me that story again about, about why we're doing this and what rebalancing is? And that volatility is normal. It's completely normal. I I liken it to, it's cheesy, but flying on a plane, I'm not the biggest fan of turbulence. I've gotten better at it. But when there's turbulence, you fasten your seatbelt and you find comfort in the pilot coming on and saying, Hey, we're gonna find calmer skies. Right? Yeah. Might not be able to for a while, but we're gonna, we're gonna try and find them. So it's, it's similar. It's totally normal and it's totally okay to call whoever that is you're working with and yeah. Have that conversation. Yeah. I love the airplane example 'cause I hate flying and I find comfort in, you know, looking around when it's quite turbulent up there and, and if, you know, the pilot's not freaking out and the flight attendants aren't freaking out, it makes me feel a little better. And I'm sure you being, you have asked a pilot about turbulence and what did that pilot tell you? This is just, I, I get it. 'cause here's the thing, I have an irrational fear of flying.
So I feel like I understand what investors are going through. 'cause you know, in the investment world, we're kind of like the pilots, right? I mean, we deal with it every day. So the volatility and the turbulence, you know, we see it as opportunity. But I get what it's like to be a client and to be in the, in the back of that plane, because that's how I feel every time I get on a plane. But I have a, a good buddy of mine who's from high school, who's a pilot, and you know, like you said, Taylor, great point. I I literally called him one day and I'm, I was about to fly to Hawaii. I'm like, I just, I need the pep talk, you know, like I know what you're gonna tell me, but I just, I need the pep talk. And he says, Todd, I am so tired of having this conversation with you. He goes, you are literally more likely to die on the drive to the airport than on the flight. And I said, well that's great because now I'm worried about the drive to the airport and the flight. So I get it. You know, but, but, but he, he's right. And, and actually I think about that because, you know what, and I love this flying example when it comes to clients.
'cause when I think about like the real risk, it's like we all feel comfortable jumping in our car and driving around. Well, you know, don't even think about it. Yeah, yeah. 'cause we do it every day, right. But I don't know, when I get on that airplane, I'm like, I'm overthinking it. Right? But you know, like right now I think about this and it's like the car ride is inflation. You know? I mean, the risk we all think about all the time, and this is probably a different episode. We think about this risk of the market and the ups and downs and whatever, but the real risk is not being invested in the market and losing your spending power to inflation. You know, I mean, that, that is more risk. 'cause 'cause I look at, you know, I look at the long term of the market, and if we look at long periods of time over the stock market, over 10 year periods, I think, you know, and again, we're winging it now. So I would just say, I don't have this stat in front of me, but it's something like one or two 10 year time periods ever in history. Has the market ever lost money? Right. But we always have inflation, you know, I mean, not always, but I mean, think of a 10 year period where we had no inflation.
You can't, I mean, we pretty much over 10 year periods have always had inflation. So it, it's like we're worried about the wrong thing, you know? So it's, it's, but it's again, it's just like, it's like flying. Like every once in a while when that plane does go down, it's like this big event and this, you know, big horrific thing and it's on the news and everything, right? But we don't hear about the cars that are crashing every day and people that are passing away and car wrecks daily all over the country. You know, we don't hear about that. So it's kinda the same thing with the market. You know, you turn on the TV and all they're talking about is the market's up, it's down, you get, pull up your phone, right? I mean, back when I first started doing this, we didn't even know what the market did until we got the Columbian the next morning. So it was delivered in the morning. You know, we didn't even know what the market did until the next day. So anyway, it's harder these days with all the technology and the phones and everything else. But anyway, so. Well, these are great tips, great tips, Taylor. We appreciate having you on and appreciate everybody listening and tuning in and looking forward to our next episode. Thanks. That was super fun. Yeah. We'll talk again soon.
The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or specific security. It is only intended to provide education about the financial industry to determine which investments may be appropriate for you. Consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices reference for comparison are unmanaged and cannot be invested into directly. As always, please remember, investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Momentous Wealth Management Inc. Is a registered investment advisor. Advisory services are only offered to clients or prospective clients for Momentous Wealth Management, Inc. And its representatives are properly licensed or exempt from licensure. No advice may be rendered by Momentous Wealth Management, Inc. Unless a client service agreement is in place.
