Market Volatility – Episode 572

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. Today we’re going to be talking about market volatility. This is very specific to our use case right now in an election year. It’s specific because of the rise of AI. It’s specific because of the speed at things that are moving. That doesn’t mean it’s bad. That can be a really good thing too. So Kim, when you hear about volatility and you hear of these pieces, is that something that’s negative or positive? What is your perspective from the grapevine? To me, volatility is just life. If we didn’t have uncertainty in our life, it would be very boring. So volatility is an aspect of uncertainty, things that go up and things that go down

[00:54] at times when we didn’t expect it. It applies to all areas of life. There’s volatility in our health. There’s volatility in the stock market, in the real estate market, in our cash flow, in our overall home economy, in the overall economic environment at large. There’s just movement, really. That’s all volatility is. And so it’s important to understand how to take advantage of it. I think one of the biggest challenges between math at a grade school level, or maybe this is actually junior high, and personal finance math, is the difference between average and actual. And volatility is often addressed around the concept of a mathematical average. So your stockbroker, your money management person is going to say, oh, the S&P 500

[01:49] for the last, you know, fill in the blank, 30 years, 10 years, whatever their time frame is that they’re picking, has average, and then they’ll quote something, and it’s usually 10, 11, 12%. But because of volatility, the actual rate of return that you might have earned on your dollars is going to be drastically different, potentially, than the average. So average, as we all know, you know, there’s math. You add up your one plus your two, let’s just do five years, plus your three plus your four plus your five, and then you divide by five. That’s a mathematical average. And it’s accurate. It’s not that the math is incorrect. The problem is, if you have, for example, $100,000 that you put in an account, and

[02:39] the first couple of years, the volatility is such in that particular investment that your account is negative, that’s going to dictate your actual rate of return five years later to be way, way different than, for example, you put the same hundred in, but your first few years are very positive. And then it goes negative, as we know that it does. Then that volatility is going to dictate that your actual dollars, and then consequently, the rate of return that you earned, are different than the person that started out with it being negative at the beginning. In stock broker language, this is called the sequence of returns, right? Was the first second year negative and then positive, or was it the other way around?

[03:21] And so it’s so important when we’re looking at volatility to not be sucked in to averages. I hear it all the time. People quote this like it’s a guaranteed deal. Oh, the S&P is average 10 point whatever. And then they think that’s actually what they’re going to get. And that is incorrect. Yes, yes, absolutely. So when I’m thinking in terms of volatility, a lot of this comes from conversation that I’ve had with friends and other business associates. And I’m seeing changes happen in marketplaces. So for example, a couple of my friends, they own a few different firms in the real estate investing space. And where they used to be able to pick up and purchase properties, sell them, and they were selling them to hedge funds and to private equity groups.

[04:14] That’s gone away. Where I have friends that are business brokers, they’re seeing severe volatility in the types of businesses that are selling because of the baby boomer population that’s happening. Going back to your math, oftentimes people talk about the averages and the stocks, but when we go over and think in terms of life insurance, you know, we’re talking about something that’s different there. So this volatility, one, I don’t want us to necessarily live in the world of, oh, things are getting more expensive. That life is harder. No, I want to be able to look at it and say, here are the few things that we’re certain, and then here are the opportunities. So let’s navigate in that area.

[04:57] What is some feedback that you have, Kim? Well, it is an excellent question. So as we know, life insurance cash value growth is certain. It is not volatile and it is consequently very boring and it is not the fun, sexy stuff to talk about, and that’s why there are not a lot of people out there talking about it, unless of course they’re trying to layer in fanciness and complexity. But when you just boil down the life insurance product to its simple state, it’s liquidity, it’s cash, it’s emergency opportunity money, and it grows absolutely positively every single year, even if the insurance company doesn’t pay a dividend. And most mutual life insurance companies, so we’re talking Guardian, MassMutual,

[05:39] New York Life, Northwestern Mutual, Penn Mutual, Lafayette, One America, those types of companies have paid a dividend every single year for well over a hundred years. That also is not volatile. Now, as an example, the SAP 500 with dividends, which indexes don’t always include them, but let’s just stay simple, it had a negative year in 2008, okay, no surprise, right? We all know that that was a challenging year. What most people don’t remember, even though this was just two years ago, is that 2022 was a negative year. The S&P 500 was down 18%. Now the press will come in at the end of 23 and say, oh, we’re, you know, we were up 26%. Well, yes, that’s technically accurate. The problem is we came from down 18.

[06:31] And people that look at their 401k balances pretty regularly, or maybe you have stocks or bonds or mutual funds account that you look at pretty regularly, they saw that curve in dollar figures, and yet nobody really knows what to do with that other than just ride it out. Well, I know exactly what to do. And that is do both, right? Put some of your dollars where it’s certain and boring and absolutely positively going to grow, and then put some of your dollars in the fun, sexy stuff that we hope has an average of 8, 10, 12, 14%, whatever it is that you’re seeking. And whether that’s the S&P 500, whether it’s individual stocks, whether it’s real estate, anything in that double digit investment

[07:15] space has opportunity, but it also has risk. And so people unfortunately have thought that more risk equals more reward is a guarantee. And it doesn’t, more risk just means more likelihood of loss. And if you ask, as I have accredited investors, people that like alternatives, people that are stock junkies, their actual experience, they will quietly admit that they have lost a lot of money. Now they’ve gained a lot of money too, but nobody talks about the first part. And so it’s so important that at the Prosperity Podcast, we talk about both sides and we talk about what to do and what to do is to do both. So it’s an easy thing, right? Talk about both sides and then do both. Talk about the gains and the losses, but do both as in guarantee

[08:16] some of your dollars. Put as much, in fact, really a 50-50 blend is probably decent. Put as much of your new money that you’re saving and investing into that safe, certain space. The life insurance, we use the clue acronym, right? You control it, it’s liquid. You can use it for whatever you want and it acts like equity meaning you can borrow against it. Unlike things like 401k plans and that type of environment, which you can borrow from, but only a little bits of the money. Put some of your money in certainty asset and then sure, put some of your money in the stuff that’s sexy and fun that you may or may not do well with. Yes, very well said. There’s one other element to this equation that I want to cover,

[09:02] which is this, we’re willing to talk about the profits and the losses. We’re willing to talk about the sexy and the unsexy. The other element is time. How do you factor in time with this? Because one, you’re working with Todd, your husband, who’s using truth. I mean, true numbers. This is completely separate from any product out there, but you’re also working with individuals you’ve done for decades and time is the only thing we can’t get back. So where do you focus and let’s take time and volatility. Let’s have a conversation between those two. That is excellent because time is what must be added to grade school math in order to elevate it to personal finance math and time is also what inflation is so driven by and inflation like right now today.

[09:58] Yes, there are things that the price has increased incredibly, but there are also things that the price is reduced. I mean, can you imagine the computer that we can buy today for a thousand dollars that used to be five or six grand just 10 years ago. And there are clothes that you can get today for 20 and 30 dollars. It used to be two and three hundred dollars just a few years ago. So some things have actually been, I don’t want to say benefited from inflation, but they’d gone the other way, right? And this is a function of time. Now there’s another really critical element of time and that is what inflation does over time, which is absolutely positively make things cost more and more and more.

[10:43] Again, there’s two things that benefit from inflation in the personal finance realm and that is mortgages and life insurance premiums because those are both set and not changeable. So a 30 year mortgage fixed price, of course, that’s never going to change that actually then you benefit from inflation and all the life premium is the same and then you have these other things that come into play. But time is so critical and we have such a misaligned perspective as it relates to time and one of the things that we just forget about is how long people are going to live these days. 80 used to be sort of normal. Now it’s a hundred. It’s going to be 120 here very shortly. In fact, for young people today, 20 and 30 year old, you need to

[11:26] plan on living another hundred years. Like that’s just going to be normal. In fact, Peter Diamandis says age 100 is the new 65. Now we’ve said 87 is the new 65, but he pushes it up there because he does a ton of longevity studies. And so this is an element of time. And as you said, not only can you not get your time back, so you want to be very careful how you use it, but time is something that in the personal finance realm, we must be aware of and as we do get older in our lives, we may actually want to pay for more things to get done to protect our time, because maybe we don’t enjoy doing those things, or maybe we physically can’t do those things. And so that’s another reason to work as long as possible so that we

[12:13] can continue to pay for the things to get done that we don’t want to do. Oh, so good. You know, the, the nuggets in there, there’s a couple that you’ve said before, but I just take and I look at it and say, okay, it’s a principle, which is we’re looking at like mortgages and life insurance. And those are the things where we can lock in now and benefit from inflation and benefit from the future. It’s also those other things where a lot of people are just scared to move ahead and they’re, and they’re doing great, maybe they’re saving a little bit. The other side of that is we’ll see apathy at times. Say, oh, I’m never going to get ahead. No, like right now you have right now, there’s volatility.

[13:03] There’s always been volatility right now is like a lot more certain than it was during the great depression. And what came out of the great depression was just absolute prosperity. So imagine with the help of AI, information, community, all of these pieces, like how amazing that is. So, Ken, thank you for sharing that on this episode today. For any of you listeners that have additional questions, please take a look inside of the show notes of this podcast or send an email to hello at prosperity thinkers.com. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit prosperity thinkers.com.