Bear Markets and Sequence of Returns

By Dean Barber

July 29, 2021

Bear Markets and Sequence of Returns

Key Points – Bear Markets and Sequence of Returns:

  • Why Sequence of Returns Matter
  • Bull Markets vs. Bear Markets
  • The Art of Financial Planning
  • Historic Market Valuations
  • 24 minute read | 37 minutes to listen

Bear markets and sequence of returns. Join Dean Barber and Bud Kasper as they tackle the question: Can retirees survive the next bear market? It’s not a question of if – it’s a question of when will the next bear market will occur. They’re going to discuss strategies so that you can survive the next bear market.

Complimentary Consultation

Article: Can Retirees Survive the Next Bear Market?

Download: Retirement Plan Checklist

Bear Markets and Sequence of Returns

Dean Barber: Thanks so much for joining us here on America’s Wealth Management show. I’m your host Dean Barber, along with Bud Kasper, and it is my pleasure to be interviewing the Bud Kasper today, author of the latest article, Can Retirees Survive the Next Bear Market? And Bud, you did an excellent job on this article.

And of course, Bud, nobody knows when the next bear market is going to occur. We had the fastest bear market in history and the fastest recovery from a bear market in history in 2020. But here we are in 2021, just a few months from that bear market in 2020, and we have markets at all-time highs. And many people are out there wondering, “What is happening? How is this possible that these valuations are as high as they are today and this mania that we see of buying in the stock market seems to have no end in sight.”

Security During Low-Interest Rate Environment

Bud Kasper: My reply to that is it all depends on how you look at it. I mean, yes, we had a horrible and swift downturn. We lost 30.75% in a matter of what, five weeks, something like that. And you’re right; then we had the recovery that came back. But it’s all a matter of choice. Where am I going to put my money? Well, you’re not going to get any return on money markets or anything like that.

So people will gravitate to where they think they can safely put money or with a modest amount of risk. And that essentially was what it was. You didn’t have a choice, Dean; with the federal reserve keeping interest rates as low as they are, you’re saying, “I can’t stand to have my money sitting there and only making 1.5% on an annual basis. I’m willing to go, let’s say to a dividend-paying stock that’s paying maybe 2.3%, but at least I have some upside potential with that.”

Dean Barber: And even if the stock goes down in value, my income stays the same, right?

Bud Kasper: That’s right, or you can buy more and get more income because you’re buying it at a smaller price.

Safety a Key Concern

Dean Barber: It’s interesting. We’re going to get to answering the question, can retirees survive the next bear market, but just this last week, I had a conversation with one of my clients. The wife had inherited some money from her parents, and she said, “You know what I want is to make sure this money stays safe.” And I said, “Okay.”

So she’s got it in the bank and earning zero point something, maybe a half a percent. If she puts it in a one-year CD, she might get 0.7. And I said, “Well, let me do some looking.” And it had been a while since I had attempted to go out and build a high-quality muni-portfolio or a high-quality corporate portfolio. And the best that I could do was a muni portfolio with an average maturity of 18 years from now and a yield to maturity of 3%, bonds trading at a 14% premium.

Dean Barber: So what that meant is the yield to worst, which means that if these bonds are called before maturity, a yield to worst of just 1.7%, and that’s an 18-year duration, okay? Now when you look at that, and you say, “Wow, that’s crazy.” But then you step back and say, “Well, the 10-year treasury is 1.3.” So 1.3 for ten years, 1.7 for 18 years.

Bud Kasper: Worst case.

Dean Barber: Now it all kind of makes sense, right?

Bud Kasper: Right.

Dean Barber: And so, I just said, “You know what? My suggestion is just to keep the money in the bank for now. If your primary concern is safety, that’s too long to tie that money up in an environment where-

Bud Kasper: At that lower rate.

Dean Barber: At that lower rate in an environment where we know that the chances of interest rates staying as low as they are for a prolonged period is pretty slim.”

Why Sequence of Returns Matter

Bud Kasper: No doubt about that. Well, to kind of set the stage for this article that I just finished, I want to go back 13 months because I wrote an article called the Serious Consequences of the Sequence of Returns in Retirement. When you look at that, this is simply taking numbers and using it as a distribution rate, and in the sequence of returns, those are the ones we don’t know. You just gave an example right there. So my point is, you’re in retirement, and what’re the worst thoughts that go through retirees’ brains?

Dean Barber: I’m going to run out of money.

Bud Kasper: I’m going to run out of money. I am entering into this at an all-time high in the stock market. I’m nervous as I can be. I can’t imagine putting money into the stock market after we’ve had this significant increase over the last year. And that’s a genuine concern for people to have.

However, as you and I learned from Mr. Slott when you look at the sequence of returns that are coming out, whether you have gains in the first few years of a sequence, let’s say 25 years in the example that I used, or whether you have losses at the beginning of that retirement experience. Those both make a significant difference as to how much money you’re going to have at the end of your retirement life.

Dean Barber: Bud, it can, but it doesn’t have to.

Bud Kasper: It doesn’t have to.

Diversification is Critical to Retirement Planning

Dean Barber: And here’s the reason why I say that, okay? I say that because people think there’s nowhere else to go with their money, and so that’s why money’s piling into the stock market. Look at the hype around an index fund. And I don’t care which company it is that’s issuing that index fund, whether it’s a mutual fund, index fund, or whether it’s an ETF index fund. People are literally sitting there with 100% of their money in these index funds, and that’s their retirement plan. They’re going to start trying to take a systematic withdrawal.

And the example that we’re going to get into here later today is that person. All right, I’m going to call it the average Joe, who just thinks, “Well, geez. I mean, look, they tell me on CNBC just index it, right? I mean, John Bogle from Vanguard says just index it. You’re going to be better off than anybody else because the index over time is going to outperform the active measure.” But that’s what this is all about, and we’re going to show you the perils of that. Then we’re going to discuss how you combat that thought process and how you create a successful retirement regardless if you’re retiring at market highs or if you’re retiring at market lows.

So Bud, diversification, we’ve talked about that, right? Diversification is key. We’ve also talked about the bucket strategies of having X amount of spendable dollars in a very, very safe place. So those are ways, and we’re going to talk about those as we progress through the show here today, but those are ways that people can combat this idea that you’re retiring or are retired at market highs with valuations that we haven’t seen in our lifetimes.

Sequence of Returns in Retirement

Dean Barber: Bud, all right, so this idea of a bear market, we’ve had a couple of pretty good downturns over the last say five years, a significant downturn last year, but it didn’t last very long. We wound up in positive territory last year, but let’s go back to two timeframes that scarred everybody that we were working with and millions of Americans facing a retirement; the beginning of the dot-com bubble or the start of the Great Recession. Those were times where it was scary for people.

Bud Kasper: Yeah. We had a 46.5% loss that we experienced in three years in the dot-com bubble. We had a 38.5% drop in a single year when we had the Great Recession. And, of course, that extended past that point. It was more like 52% altogether.

And I don’t think that wound has closed yet.

Eventually the Markets Come Back

Dean Barber: Well, for you and I, but look, think about this. All right. So people are retiring this year or next year, or in the next five years, but that was 13 years ago, right? Those people were nowhere near retirement, and they were still following that whole idea that you just buy and hold and eventually what’s going to happen is, or you do your reallocation.

Eventually, the markets come back, and it heals everything. And so in the article that you wrote asking the question, Can Retirees Survive the Next Bear Market? You gave an example of a person that did nothing but buying and hold over 25 years. And so, set the stage for what you did with the sequence of returns here, because if we talk about retiring at the bottom of a bear market or the top of a bull market, we have to ask the question which one’s better?

Dean Barber: And what we’re going to discover is that really, it makes no difference if you’re just a long-term buy and hold investor, but it makes a big difference if you are taking income.

When Sequence of Returns Didn’t Matter

Bud Kasper: Yeah. Taking distributions. You’re so right. First off, I want full disclosure with this; these returns that we’re using were just created. In other words, they’re not paralleling what’s happening with the S&P 500 or, for that matter, looking at, let’s say, a 60/40 portfolio, but we all do that at some point in the future. What we were looking at, and I refer to this as Mr. Jones and Mr. Smith, both aged 65. Although, Dean, you brought up the point during the break that if you’re 40 years old, that still applies to what we’re looking at with this.

Dean Barber: Right. Because the reason I say that is because the typical 40-year-old is not going to be taking distributions. So let’s first, for example, assume that this person’s 40 and they’re going to put in a million dollars. Then they’re going to let it sit for 25 years, and at the end of 25 years, now we’ve got to retire.

Minimal Effects on Long Term Investors

Bud Kasper: Exactly right. So when we look at that in Mr. Jones’s case, just to give you a sample of the first few years where you had a 5% positive return, then a 28, then 22, then a minus five, then positive 20, 19, 23 for seven positive years. When you get to the end of that, the very last year when the person was 90, there was a minus 25% decline, but the result was $4,288,197. So, that’s how much Mr. Jones made during that timeframe. And that was an average return of 6%, Dean.

Bud Kasper: And we look over at Mr. Smith. And what we did is we reversed the numbers. In other words, the 5% first-year return that Mr. Jones had ended up being the 25th return that Mr. Smith had. So we just reversed the order. So in the case of Mr. Smith, he had minus 25, remember Mr. Jones was a positive five. We had a minus 14 in the second year versus 28: the following year, minus ten versus the 22. And then we had some positive years that came in for Mr. Smith. Now here’s the crazy thing of this from a math perspective, they both had the same return in terms of dollars-

Dean Barber: The average annual return of 6%.

Bud Kasper: Yeah, at the end of the period. And so, both of them had $4,288,197.

Dean Barber: Right. So what that does is tells us that the sequence of returns doesn’t matter when you’re simply accumulating money. When simply you’re buying and holding the sequence of returns, it doesn’t matter. So when you hear the verbiage out of Wall Street, just buy and hold, and over time, everything’s going to be fine. If you’re young, if you’re accumulating, that’s an accurate statement. Don’t make a knee-jerk reaction.

The Impact on Retirement Distributions

Dean Barber: However, you and I both know, Bud, that when we do something called reverse dollar-cost averaging, it means you’re taking money out of your account every single month to live on.

Bud Kasper: Right. Which is what we do in retirement

Dean Barber: So what happens, that same scenario where Mr. Smith had the income coming out and had those negative years initially actually ended up running out of money at age 83.

Bud Kasper: That’s right.

Dean Barber: So, 18 years into retirement, gone, out of money. And that’s just taking a 5% withdrawal and not increasing that income with inflation.

Understanding Distributions within Sequence of Returns

Bud Kasper: That’s exactly right. So, the key here is the 5% because that’s $50,000. Remember, they both started with a million dollars. So that is, as you stated, a $50,000 distribution that’s coming out of these accounts. And the amazing thing is when we got to the end of the sequence of returns that Mr. Jones had versus Mr. Smith, Mr. Jones ended up with two and a half times what he started with. In other words, his ending balance was $2,517,000.

Dean Barber: And he took a million dollars in income.

Bud Kasper: $1,500,000 in income.

Dean Barber: Yeah.

Bud Kasper: So that tells you a big story right there because, as you stated, Mr. Smith ran out, and it was all due to what? The sequence of returns and the same distribution rate coming out every year caused Mr. Smith’s account failure.

Dean Barber: Okay. So, Bud, when we began the show today, we said the number one fear of people entering into retirement is running out of money. Okay. They don’t understand that the rules of investing change dramatically when you enter into retirement.

Making Your Money Work for You in Retirement

Dean Barber: So, Bud, what I’m seeing is, what happens here is that people in their accumulation years get a certain set of beliefs based on what their experience has been through that accumulation phase. But when you retire, you’re no longer working for your money. You’re now saying, okay, money; it’s time for you to go to work for me.

Bud Kasper: Yes. I like that.

Dean Barber: And so what you’re asking your money to do in retirement is different than what you were asking your money to do before retirement. And it is critical that you understand the distribution phase of life. And to me, Bud, when we began to hone in on it, that became our specialty.

That’s why we created the Guided Retirement System™. That’s why we created America’s Wealth Management Show because we want to talk specifically to those people that are in that phase of life, where they plan to retire or are retired because the rules are dramatically different. Nobody is talking to you except many annuity salespeople talking about how to get income in retirement.

Bud Kasper: Right. And the insurance company is using those people’s money to get a higher return, hopefully. Yeah. One of the takeaways from this, the sequence of returns that we’re talking about. Now we have to adjust something. What would it be? The distributions, of course.

Making the Right Adjustments within Your Plan

If you start with a lousy sequence where your account’s dropping, you better adjust inside of your distribution if you want to survive, is what we’re talking about. But the other thing you could have done is adjusted the portfolio so that when in year one, when they had the 25% drop, what if it was only a 15% drop? What would that have done to the elongation of the money?

Dean Barber: Or Bud, what would have happened if you had been smart about what was going on and said, you know what? I got to have my money that I know that I’m going to be able to spend, that’s not going to fluctuate in value and give me three years’ worth of income there so that if I’m taking money out of an account, it’s not coming out of an account that’s falling in value.

Bud Kasper: Right.

Dean Barber: And then I take another piece of money, and I say, well, from years four to years ten, I need a very moderate portfolio. I need something that’s not going to have a lot of risk, but something that will have the ability to get a reasonable return over that period. And then the years ten plus, I can go back and invest like I’m ten years younger. Then I can have more money in the market because history tells us that the longer I can leave that money alone, the better off it will be.

Bud Kasper: Exactly.

Dean Barber: Bud, let’s tackle more strategies on how retirees can survive the next bear market.

Retiring During Bear Markets

Dean Barber: All right, so today we are talking about asking the question can retirees survive the next bear market, and the answer is unequivocal, Bud, yes. 

I had people that retired in 2000, and you know what? They stayed retired. They thrived during retirement, and they did the things that they wanted to do. I had people that retired in 2007, just before the Great Recession, where the markets fell by how much?

Bud Kasper: During the Great Recession? 

Dean Barber: Yeah.

Bud Kasper: That was 52%? 

Dean Barber: Yeah, and they are still retired today. And you know what? They haven’t suffered. But you know why? Because we had a strategy. We had a plan. We didn’t go by some target-date fund and say, “I’m just going to put my money in here because I’m going to retire in 2010. That’s my magic.” No, that’s not your magic. Your magic is creating a sound financial plan with a proper distribution strategy that considers the possibility of poor market conditions at any point in your retirement. 

A Stress-Tested Plan is Critical 

If you’re not doing that, and you’re not stress-testing your retirement to take into consideration whether or not the markets are not always going to be as rosy as they’ve been the last 12 months, or that we’re not going to have these speedy V-shaped recoveries. In that case, you are setting yourself up for failure, Bud.

So if people don’t survive the next bear market, it’s their fault. It’s not the market’s fault because we know that markets over the long term are efficient. But we also know that they can be very emotional and irrational in the short term and can cause people to make emotional and irrational decisions if you don’t have a plan.

Understanding Risk and Sequence of Returns

Bud Kasper: Yes, and I like how you said that, Dean, but the one thing that needs to be added to that is things are different when you’re in the distribution phase of your life. And you must recognize that there’s an inherent risk when you’re taking money out of that bucket of money you saved for your retirement.

However, understanding sequence of returns, bear markets, bull markets, and, most importantly, your level of risk is the way you should approach your retirement. Doing that with only a professional who actually can take you through a comprehensive financial plan considers that one of the two things that we did not have in this article that I wrote, and that is the consideration of inflation and taxes.

Setting Money Aside For Bear Markets 

Dean Barber: Yes. You know, it’s interesting, Bud. I’m going to use some round figures to tell a quick story just to let people know what I’m thinking. All right, so have I, a person who’s retired, and let’s say that the value of the portfolio at the beginning of the year was $3 million. Today it’s 3.4 million. And we know that the spending of this couple needs to be about $150,000 a year. And part of that income coming in is going to be from Social Security. Roughly $70,000 a year is coming from Social Security.

So what I did was, I said, “Look. All right, so we had a good start to this year, had some good things happen. Let’s take that $350,000 that we just earned in the first seven months of the year, and let’s set that aside. That just created for us, along with your Social Security, over three years of guaranteed income.” Okay?

Bud Kasper: Right.

Dean Barber: Now, you know what the comment was? “Well, we’re going to take that money out when it’s doing so well?” I’m like, “Don’t look at it that way. What we want to do, we still got plenty of money that we’re going to try to earn a good return on. Let’s not get greedy.  

Do you know the song The Gambler? You know you got to know when to hold them, when to fold them, know when to walk away, know when to run? Well, right now, what we’re doing is we’re saying, you know what? We don’t know exactly what’s going to happen. We’re not ready to walk away. We’re not ready to run, but we’re going to take some of our winnings off the table, and we’re going to stick that in our pocket so that in case something does happen, we know that we’ve got some security planned out over the next few years.

When Market Corrections Cause Concern 

Bud Kasper: See, now that’s a strategy, and that works, and that’s effective because we’ve seen that over the years. Now let’s talk a bit about what we had as part of the article, and that, of course, is what the markets were doing simultaneously.

When you look at this, going back to 1928, there have been 26 bear markets. There were also 27 bull markets. And then we had corrections, which are defined as a drop of 10%, but remember, it can go up to 19.9% because when it crosses over to minus 20, you’re in a …

Dean Barber: A bear market. 

Bud Kasper: A bear market, right. And, of course, that’s where the concern is. We’ve had such an increase in the stock market. And as you, I think correctly, said at the beginning of the show, people are starting to get concerned that this is overvalued, and what happens when assets are overvalued? The correct and bring it back down to a level. And what do people do at that particular point? It looks more attractive. Therefore you feel a little bit more comfortable investing at that point than you would- 

Dean Barber: But if you have too much money in there, Bud, and you don’t have the proper allocation, you haven’t done the right rebalancing like we’ve been talking about this year, you wind up selling in a panic.

Bud Kasper: Right, right.

Dean Barber: Okay?

Bull Markets vs. Bear Markets

Bud Kasper: In the article, I wrote about how a bull market is born out of the ashes of a bear market. Remember, at plus 20% is when we’re officially in a bull market. You commented that coming out of the COVID crisis last year. It was one of the shortest bear markets and fastest bull markets that we’ve experienced in history.

When you look at stocks, stocks lose around 36% in a bear market on average, and they gain 112% in the average bull market. So, when you look at those considerations, it favors bulls over bears, and that’s the way of the market. If it wasn’t that way, we probably wouldn’t use that as our investment decision.

But bear markets are relatively short-lived, averaging only 289 days, or 9.6 months, while the average length of a bull market is 973 days or 2.7 years. I’m giving you these statistics because they are accurate from that perspective. Still, we have to understand whether or not it’s to the advantage of our clients to have more exposure or less exposure at any given period.

Why Average Annual Returns Aren’t Real Money Gains

Dean Barber: Well, and that’s really, that’s exactly what we’re talking about. And you know, we’re working on another piece, which we’ll release later this year, called Why Bear Markets Matter More Than You Think. The fact of the matter is that bull markets can go up and up and up, but bear markets, they have a floor. Right? You can only lose 100%. Okay? You’re never going to have a bear market that’s going to lose as much as what a bull market made in percentage terms.

Bud Kasper: Yes.

Dean Barber: And so when you say the average annual return is X, let’s just use an example. Let’s just say that you made 100% one year, and then you lost 50% the following year. What’s your average annual return? It’s 25% because you made 100 and lost 50, and so you should still have a gain of 50%. Right?

Bud Kasper: Yes.

Dean Barber: So, your average annual return for two years is 25%. But if you had 100,000 and it grew to 200,000, and then you lost 50% of that, and now you’re back to 100,000, so your average annual return is 25%, but you’ve got zero in terms of real money gain.

Bud Kasper: Right. 

Sequence of Returns Matter During Distribution 

Dean Barber: And that’s why I say you can’t spend average annual returns. And we illustrate that in your article, Bud, showing that the sequence of returns matters when you’re in the distribution phase because when you start spending out of that account, you can create a self-fulfilling prophecy that you’re going to run out of money.

Bud Kasper: That’s exactly right. I talked about bull markets are born out of the ashes of a bear market, and that’s a true statement. You mentioned earlier in the show about John Bogle, the founder of Vanguard. His take on that was just to invest in the indices and don’t change anything. Just ride it out for whatever timeframe you’re looking at.

So when you look at that, stocks start to grow out of a market 32% of the time in the earlier stages, but here’s the problem. If the market’s down, let’s say pretty severely, and now it’s coming back up, what they’re effectively saying, if you never got out, now you’re going to get the early stages of what might end up being a new bull market. Okay? But the problem is you had to eat all that pain to stay in the investment for that timeframe, and, quite frankly, people can’t do that.

Dean Barber: No, that’s why you got to have the right diversification. You got to have the right triggers to say, “All right, now it’s time to take some winnings off the table. It’s time to get a little bit more conservative. And you know what happens? Our Guided Retirement System™ shows you how to do that and when you should be taking the risk off the table or increasing the amount of risk in your portfolio. And sometimes it’s counterintuitive to what the emotion inside is telling you, but if you follow the math and you follow the planning logic, then it works.

The Art of Financial Planning

Get a copy of our Retirement Plan Checklist and read the article Can Retirees Survive The Next Bear Market? The answer is yes, Bud. And you address that here in a part of the article that you wrote. You talk about the art of financial planning. So, there is a science behind financial planning, but more importantly, Bud, there is an art behind financial planning. And if all you’re going to do is just sit back and look at mathematical equations and things like that, that’s not it. There’s an art form to good, solid financial planning, especially for financial planning for people that are in the retirement years or nearing those retirement years.

Bud Kasper: I totally agree. And it was fun to do the article, and the sequence of returns has been something you and I have been familiar with for probably 15 to 20 years. It keeps coming up as a topic because it is essential for people to understand, especially those already in or about to be in retirement. When we overlay the bull market or the bear market and look at the lengths of time of those on average and the frequency they occur, I thought that put a new dimension inside of that.

Bud Kasper: And if you’ll forgive me for this, I’m going to read something to our listeners from the conclusion of the paper, Dean. I said, “Understanding how to best handle bull and bear markets becomes a mathematical and statistical art form. Comprehending how each asset integrates with your total portfolio as defined by your personal tolerance for risk, and then vetting it through both bull and bear markets, is the first step in designing an appropriate asset allocation strategy.”

Finding Your Personal Return Index

Dean Barber: Okay. So let me put that in layman’s terms.

Bud Kasper: Okay.

Dean Barber: All right. What Bud’s saying there is, first define, “What does your money need to do for you to get the return that you need, or for you to have the lifestyle that you want?” In other words, “What is your personal return index? What does your money need to do?” Then, what he’s saying is, “How do we get that return with the very least amount of risk possible?”

There you go. That’s what you just said in there.

Bud Kasper: Right, understanding the personal risk that everybody has. Some people, a little more risk-averse. Some people, more compliant to have risk in their portfolio. It’s an individual decision.

Dean Barber: It certainly is. And have you ever heard that old adage, Bud, “It’s time to buy when the market’s high?”

Bud Kasper: No.

Dean Barber: Man, where have you been? I mean, look at all the people out there, the market’s at all-time highs, and money is just pouring in. So obviously, you’re missing something.

Bud Kasper: Yeah. Well, back to school.

Don’t Buy When You’re High 

Dean Barber: I think these people need to hear the old adage, “Don’t buy when you’re high.” Because look at where the markets are today, and yet the dollars just keep pouring into the markets. And I want to go back and do a little history lesson here. During the last five years of the 1990s, 1995 through the end of 1999.

Where were the returns? Where were the best returns ever?

Bud Kasper: Technology.

Dean Barber: Technology and what? Telecommunication.

Bud Kasper: Right.

Dean Barber: Okay. And that was part of the NASDAQ Composite.

Bud Kasper: Right. NASDAQ 100.

Dean Barber: They referred to it as the tech-heavy NASDAQ back then. Remember that?

Bud Kasper: Yes.

When Did the Most Money Come in During the Dot Com Bubble?

Dean Barber: All right. So, in that five-year period, which was the best five-year period ever in the history of the NASDAQ. How much of the money came into the NASDAQ? Of all the money that poured in, in five years, how much of that money came in, in the last half of 1999.

Bud Kasper: Well, how much money?

Dean Barber: As a percentage of the total money that flowed into those stocks.

Bud Kasper: I’d probably say, I’m making a guess, 40%? 

Dean Barber: No, 70%. 

Bud Kasper: Oh my gosh. 

Dean Barber: So 70% of all the money that flowed into the technology and telecommunication stocks during those five years flowed in, in the last half of 1999.

Bud Kasper: Yeah.

Dean Barber: So, don’t buy when you’re high. Okay? People, they’re sitting there Bud, and you watch the news, and it’s, “This company is doing this, and this company is doing that.” It’s no different than this Bitcoin mania today, or all the other things that are going on, where you’ve got these stock prices that are just out of control and people are sitting back, and they haven’t participated, and now they’re thinking, “Well, I’m missing it. I got to get in.” 

Bud Kasper: Right. 

Dumb Money vs. Smart Money

Dean Barber: Okay? We talk about dumb money. We talk about smart money. Well, guess what? There’s only a certain number of shares of stock out there to be purchased or sold. The people that own it today at these ridiculous prices want you to buy it from them.

Bud Kasper: Yes.

Dean Barber: Okay? 

Bud Kasper: Right.

Dean Barber: That’s the dumb money. They’re telling you, “Look how good we’re doing. You’re missing out, man. Get in.”

Bud Kasper: Yes, this really should be on TV because you’re so passionate about it.

Dean Barber: Oh my gosh. But it’s scary, Bud.

Are Earnings Supporting the Market?

Bud Kasper: It’s scary from this perspective. We just talked about the five years that you just talked about, incredible returns. And of course, we remember, because we were in the business back then, that people were looking at prices that were moving up three, four, five, more times what they were, and they didn’t have the earnings to support it. 

Dean Barber: They don’t today, Bud. 

Bud Kasper: Yeah. 

Dean Barber: You got price-to-earnings ratios on a lot of these companies that are exceeding two, three, 400. All right? And a normal price-to-earnings ratio is 15 to 16? Come on.

Bud Kasper: Yeah. And what followed after that was what we referred to as the dot-com bubble.

Dean Barber: Right.

Bud Kasper: And what that meant was, in the next three years, we were down 10%, 13%, and 26%. The total is going to be 46% down in a three-year timeframe in the S&P 500. Now, if you had a lot of money accounts and trades that, or even worse, if you were retired at that time and had a lot of money accounts and traded in the S&P 500, you were an unfortunate person. 

Historic High Market Valuations

Dean Barber: What are we going to call this bubble when it bursts?

Bud Kasper: Biden’s bubble.

Dean Barber: You could call it the crack bubble. So, here’s what I think of the Federal Reserve right now and the stimulus that they’ve provided. The bond purchasing of keeping interest rates near zero is like crack to the market.

Bud Kasper: Yes.

Dean Barber:  Okay? And we have been, Bud, since the late 2000s, we’ve been saying, “Don’t fight the Fed.” And because the Fed is inducing this whole idea about, “What do they want you to do?” Ben Bernanke came out and said it, remember what he said? 

Bud Kasper: Oh.

Dean Barber: “We want people to put their money at risk. So we’re going to take away the ability for people to get a good return and keep their money safe.” They want the money at risk. They want it pouring into the economy, into the markets. They want it active and moving around.

Irrational Exuberance

Bud Kasper: Now, the antithesis of that was in 1996 when chairman Greenspan at that particular time came in and made the statement, he thought the market was experiencing quote-unquote irrational exuberance.

Dean Barber: Right.

Bud Kasper: Okay. And did the market react to those comments?

Dean Barber: Absolutely.

Bud Kasper: Oh, it didn’t. What the market did is it went up and up and up for three more years, ignored him completely. Until what? That final day, when we started into the year 2000. People will remember Y2K and all that. And what an issue we had at that time, down 46 in the next 36 months.

Dean Barber: Yeah. Those were tough times. And that’s why we thought it’d be interesting to talk about this because this is the first time we’ve seen valuations higher than they were in January of 2000.

Bud Kasper: Mm-hmm 

Dean Barber: We’ve never seen it before, Bud.

Bud Kasper: Yes.

You’re One Shot at Surviving a Bear Market

Dean Barber: Okay? So again, what’s it going to be? You wrote the article, Can Retirees Survive the Next Bear Market? And you know what? You can. But you can’t do it by simply following the herd. You can’t do it by simply saying, “I’m going to index this.” Look, you don’t get a mulligan in retirement. There’s no such thing as a do-over. You don’t get to change your mind. You get one shot to get this right. 

Bud Kasper: I mean this with all sincerity, you need to be working with a CERTIFIED FINANCIAL PLANNER™ because it’s the plan that matters the most. The investments, of course, are critical, but they need to be understood and defined. 

Dean Barber: The investments can’t be decided upon until the plan is done. 

Bud Kasper: Absolutely. 

Dean Barber: If you’re doing it that way, it’s like asking somebody to build a home without having a blueprint first. You can’t do it. Right?  

You have to have the financial plan done before you discuss your investments. Otherwise, you’re doing it backward, and you’re operating simply on fear and greed.  

Don’t do that. Join us again next week. We’ll be back with you next week, same time, same place.

And as always, we invite you to schedule a complimentary consultation with a CFP® to discuss your retirement situation.

Schedule Complimentary Consultation

Select the office you would like to meet with. We can meet in-person, by virtual meeting, or by phone. Then it’s just two simple steps to schedule a time for your Complimentary Consultation.

Lenexa Office Lee’s Summit Office North Kansas City Office

Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.