This week, Josh & Austin discuss volatility…which seems appropriate considering the tumultuous start to the year for equity markets. Topics include: what it is, some statistics (which Austin will nerd out about), and what you can do to continue to keep on track to meet your financial goals during this COVID-19 bear market. Thanks for tuning in to this week’s episode of The Invested Dads Podcast!
Links & Resources
Episode 009: Don’t Fall For It (Ft. Ben Carlson)
Simple Wealth, Inevitable Wealth by Nick Murray
Situational Awareness (A Wealth of Common Sense)
Main Talking Points
Volatility Statistics [2:40]
Need-To-Know Terms [4:09]
The Relationship Between Volatility and Risk [6:57]
Your Dad Joke of the Week! [9:58]
How Should You Be Handling Volatility? [13:02]
Some (Un)safe Havens During Volatility [18:09]
The Best Thing You Can Do: Dollar-Cost Averaging [20:33]
Is Market Volatility a Good or Bad Thing? [23:16]
Full Transcript
Intro:
Welcome to The Invested Dads podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, we are so happy that you chose to tune in this week.
So, today we are going to talk about something that I like to think about on up days and down days in the market. Really every day in the market because you pretty much get one or the other. Actually, I’ve seen one where there was none.
Josh Robb:
Oh yeah?
Austin Wilson:
No change.
Josh Robb:
No change?
Austin Wilson:
That was a weird day. I think there’s only been a handful ever, but-
Josh Robb:
Was the market even open that day? What did you look on a Saturday?
Austin Wilson:
But yeah, there was one weekday where the Dow was unchanged.
Josh Robb:
Oh wow!
Austin Wilson:
It was very weird, but it went all over the place during the day and ended flat. So anyway, growing up in Ohio, I naturally have spent many days at both King’s Island and Cedar Point over the years. And I grew up actually really enjoying roller coasters and I honestly don’t understand how some people don’t like them. I think they’re crazy. But if you don’t like them, I don’t dislike you. That’s okay.
Josh Robb:
The older I get the harder it is to ride a roller coaster. I’m going to be honest with you. I grew up just like you. We went to Cedar Point at least once a year, rode every ride, loved it. But the last couple times I’ve been on roller coasters it’s just been like, “Whoa, man, I feel it. I feel it.”
Austin Wilson:
I don’t want to… When I get to your age, I’ll tone it back.
Josh Robb:
So now if you need to find me at Cedar Point I’m at that cheese fry station eating some cheese fries.
Austin Wilson:
Or the fried cheese.
Josh Robb:
Oh, I do the French fries with the cheese on it.
Austin Wilson:
It’s like a corn dog, but instead of a dog it’s cheese.
Josh Robb:
Cheese inside.
Austin Wilson:
Oh, it’s so good. So yes, watch the amount of donuts or fried cheese or fried fries you eat before the rollercoaster. But overall the faster, the higher, the twistier, the better. It was awesome. Millennium Force, sidebar, is still my favorite roller coaster of all time at Cedar Point and I’ve been on a lot of roller coasters. So, it’s really awesome. But anyways, sometimes it can feel-
Josh Robb:
I’ll tell you.
Austin Wilson:
Ooh, go for it.
Josh Robb:
I’ll tell you. I think you could put Cedar Point up against any amusement park-
Austin Wilson:
In the world.
Josh Robb:
… in the world. And it’s just straight roller coasters. We’ve taken our kids to Disney World and there’s a lot of cool stuff there and they have cool rides, but from a straight roller coaster standpoint-
Austin Wilson:
I agree.
Josh Robb:
… show me a place that’s better than Cedar Point.
Austin Wilson:
I agree. What is their theme again?
Josh Robb:
America’s roller coast.
Austin Wilson:
America’s roller coast. So buckle up.
Josh Robb:
Just don’t go during Mayfly season, if you’ve ever been there.
Austin Wilson:
I’ve seen the pictures.
Austin Wilson:
Oh man. And also don’t go in the rain because roller coasters in the rain are not fun.
Josh Robb:
They close them down.
Austin Wilson:
But if they have them going, you just get pelted in the face.
Josh Robb:
Yeah, it hurts. Yeah.
[2:40] – Volatility Statistics
Austin Wilson:
So anyway, it feels like sometimes the stock market can be like a big roller coaster. So that’s the theme this week. It seems like sometimes your market’s chugging along, click, click, clicking up the hill and then out of nowhere, boom! The floor falls out and you’re in the dark and you wet yourself in the tunnel at the bottom. That might just be me, I don’t know. But then it goes up again and the cycle repeats. So that’s the stock market right?
Josh Robb:
It repeats, huh? So volatility, that’s normal. It’s not kind of a fluke?
Austin Wilson:
It actually is very normal. So in the more than seven decades since the end of World War II, there have been more than a 110 5% draw downs. So around one to two, one per year on average, over 40 10% draw downs, which is about once every two years. And that’s typically what I think of when I think of the term correction. And there have been over 20 15% draw downs. So that’s about once every three years.
And there have actually been now 13 20% draw downs in that time. And that is what we call a bear market. And that’s about once every six years. So it’s not uncommon at all. It’s very, very normal to have big swings in the stock market.
Josh Robb:
So looking at all those stats, and we’ve seen a lot of different figures on that. When you take those all in together, the market average is about a 14% drop every year when you look at it overall. And that’s what we’ve seen over the last 20 to 30 years is some years, like you said, there’s more or less, but when you average it out, I mean you expect a double digit loss every year is what you should at least anticipate when it comes to volatility.
[4:09] – Need-To-Know Terms
Josh Robb:
All right, so we’re going to be talking about a lot of terms. So let’s first go and break down some of these terms.
So you talked about a draw down, so you’d said, there’s a draw down of 5% or whatever every couple of years. And so a draw down just means from one high point down to a lower point. So let’s say the S&P 500 is at 5,000 and then it draws down to 3,000. You lost that 2,000. All right, that’s a draw down. It’s just from one high point to another. So a draw down is the downward movement.
Austin Wilson:
40% draw down.
Josh Robb:
Right And so a draw down is really just the term can be used for any size, but from a high point down to a low point. Then we’re going to talk about terms like a bull market. So bulls are good.
Austin Wilson:
Bulls are good.
Josh Robb:
Bears are bad.
Austin Wilson:
Bears are bad.
Josh Robb:
So bull market is an upward trending market. So we use the 20% as kind of the threshold.
Austin Wilson:
So not necessarily being up 20% but just any period that does not have.
Josh Robb:
Any period does not have it.
Austin Wilson:
20% drop.
Josh Robb:
So 20% is kind of that threshold. So as long as we’re not experiencing a 20% drop from the most recent high, so there hasn’t been a draw down, 20% we’re in a bull market. Once we experience that 20% drop, we’re now in a bear market. And until we get back up above that mark we’re in that bear market.
Austin Wilson:
So as of right now we are sitting in a bear market on 2/19. The S&P 500 so February 19th the S&P 500 reach all time highs and since then things have been all over the place, kind of like that roller coaster we just talked about. So like I said, February 19th all time highs on 3/12 so March 12th, 21 days later or 16 trading days later, we closed in bear market territory with the S&P 500 down nearly 27% as the market really got scared and really feared a lot of that COVID-19 stuff that’s going on. This was the fastest drop to bear market territory on record.
Josh Robb:
Again, when we’re talking through these, these are terms that we use in our industry, it’s all relative because who chose a 20% number to define that change from a bear and to bull market? Just an arbitrary number, right? Is it fun to lose 10% of your value? No. Could you call that whatever you want it to? Yes.
In fact, we use the word correction for any kind of period where there’s a sustained draw down. So you may hear a, “Hey, there’s a 5% correction in the market.” The word correction is just meaning like that you’re correcting or moving back from a higher point. And a lot of times the correction usually comes from maybe we’ve had a long uptrend and that the markets may just catching up to itself.
Austin Wilson:
Kind of consolidating.
Josh Robb:
Correction is a term that doesn’t have a real defined number to it, but it’s referenced in the point of something similar to a draw down. It just means there’s been a movement or an adjustment. So what do you think, what is this normal volatility? How does this impact risk? How those two interact with each other?
[6:57] – The Relationship Between Volatility and Risk
Austin Wilson:
That’s actually a good question. So volatility really is a reflection of risk over time. So the stock market prices, every single instance where stocks are hurting during the day, the prices that are being reflected are pricing in the expected future. Profits, revenues, dividends, and cash flows in real time. All the time when stocks are trading.
So when this outlook changes, which it’s constantly changing, so do stock prices, and that’s actually a really good explanation as to why some of these tech giant growth companies are more volatile than something that’s more established and it’s been around a while because things change more and they change in bigger ways and the outlook changes very materially, very quickly sometimes.
So really the higher the risk over time, the higher the expected returns, but your returns are going to be a lot more choppy than something that’s less risky or even guaranteed, like fixed income for example.
Josh Robb:
So really, if I’m trading a stock, the price of that stock, now there’s an underlying value based on the company, but the actual trading price of the stock is based on what somebody else is willing to pay me for that stock. So if I own a share of the Invested Dad’s corporation-
Austin Wilson:
That’d be expensive.
Josh Robb:
And let’s say it’s trading for $10 it’s trading at $10 because in the market someone has said, I would be willing to pay you $10 for one of those shares.
Austin Wilson:
Based on what they expect to happen for the Invested Dad’s company going forward.
Josh Robb:
Yep. And then if someone else says, well, you know what, I kind of want that more, I will give you $11 for the share.
That’s volatility. It’s now in everybody’s, this trading mind is worth more money because someone is saying “I value that at a higher point.” And that’s the volatility. And that’s why you see fluctuations to is did our company change at all in that timeframe between the two? No. But the valuation change because the perception of our future success.
Austin Wilson:
Exactly. It’s all about expectations and perceptions. So as investors, whether that be people, retail investors or institutional investors as these people change their minds on what they think is going to happen for a company. So does the stock price.
Josh Robb:
Yep. Some news a lot of things can impact that, like you said. And that’s why there’s a constant fluctuation in prices. It’s because there’s always constant news coming out of not only about the company, but about our economy and the world’s economy that they’ll play into. So there’s a slowdown in China, well, okay, that’s going to impact other companies, not just China.
And so that’s where you see prices here in the US adjust because of that news, because well, they’re doing business there or they may be making products there. And so that’s the volatility.
Austin Wilson:
There are a lot of moving parts. And even so, if one economic indicator comes out and on paper you wouldn’t think it would really impact some company. It will. It will impact the economy as a whole. And then the economy as a whole will trickle down and impact every single company that’s operating in it. So every little piece of information, every little piece of news, every analyst report, every yada, yada, yada. Those are what’s priced in to the stocks at any point in time.
[9:58] – Your Dad Joke of the Week!
Josh Robb:
All right. Yeah, I like that. Let’s take a break. That’s pretty deep.
Austin Wilson:
I’m sweating a little. That was some good stuff.
Josh Robb:
I have a dad joke here for you, Austin.
Austin Wilson:
I’m a dad so-
Josh Robb:
It’s a question more than anything, okay? So you’re a car guy. You like cars, motorcycles.
Austin Wilson:
I do.
Josh Robb:
So I don’t know if you’re younger than I am. But do you recall at gas stations, the air, I don’t want to call this inflator, the air pumps, air pumps used to be free. Back in the day.
Austin Wilson:
No, I didn’t ever remember that.
Josh Robb:
You’d go to gas station.
Austin Wilson:
I always paid a quarter.
Josh Robb:
So they used to be free back in the day. You used to just go and get some air for free. Do you know why they’re not free anymore?
Austin Wilson:
Do you want another business answer or the funny answer?
Josh Robb:
To me it’s the same.
Austin Wilson:
Okay, because my business answer is that the gas stations were like “Hey we can charge them with it.”
Josh Robb:
That’s part of it. But the real answer, inflation.
Austin Wilson:
Yes.
Josh Robb:
Because they’re air pumps.
Austin Wilson:
Talking about things are more expensive over time. But inflation.
Josh Robb:
Because their air pumps.
Austin Wilson:
That’s even better.
Josh Robb:
Because they’re inflating things.
Austin Wilson:
Josh, you never cease-
Josh Robb:
That, by the way, was a dad joke sent to me by a listener out in California. So Wade, thanks for that joke. I thought it was hilarious. I thought I’d share it.
Austin Wilson:
We love dad jokes and we will share them on the show. So send them our way.
Josh Robb:
One more before we get back into it.
Austin Wilson:
Oh yeah.
Josh Robb:
We were talking about roller coasters in this volatility. Have you tried those new 4-D rollercoasters anywhere?
Austin Wilson:
I have not.
Josh Robb:
It’s incredible. So it’s a moving roller coaster with visual effects as part of it. So when we were down in, last time we went down to Florida, we went to universal studios.
Austin Wilson:
Virtual reality and a roller coaster?
Josh Robb:
So we went to universal studios and they have a Harry Potter ride that is like that. And so you’re physically moving. You’re on a broomstick is what this ride is like. But there’s interaction with things around you. 3D/actual objects. Sometimes you don’t know which one it is. It’s incredible. But it’s also, I mean, it’s a lot. It’s a lot of stimulation while you’re riding. It’s not just a roller coaster.
Austin Wilson:
I was actually, so have you ever been to an IMAX movie? So we used to go down to the Air Force museum a lot in Dayton when I was a kid, so they have an IMAX theater there and we would go see an IMAX every time I went down. And a lot of them were airplane related. So when you’re in an IMAX theater and you are quote unquote on an airplane, you literally feel some drops and spins and stuff like that in your stomach when you’re just sitting there stationary. So I always wondered if you could combine some-
Josh Robb:
Oh they do.
Austin Wilson:
Some motion with an- oh my goodness. You’d have people puking all over the place.
Josh Robb:
So this new a Star Wars thing that they just opened up, I’ve read about and the ride is, I forgot what they call it, but it’s not on a track. It’s computer program in the floor where the thing you’re in can be moved. So you have a lot more flexibility so they can change up what you’re seeing and what you’re doing and change the actual movement of the cart and reprogram it for future changes. Or they add new scenes, but it’s all screens and visual. But you have physical movement as well involved in it.
Austin Wilson:
That’s crazy. I’m going to have to try that next time I’m down there.
Josh Robb:
So that was a distraction.
[13:02] – How Should You Be Handling Volatility?
Austin Wilson:
No, that’s totally, totally fine. So Josh, what is one piece of advice that you would give listeners when things are bumpy, things are choppy or there’s like a major sell off happening, kind of like we just saw as we’re are now in this bear market due to the COVID-19 pandemic that’s really been spreading around the world. So Josh, what do you got?
Josh Robb:
So my advice is, well one is, I hope you have a financial advisor because their main job and where they earn a lot of their money is helping you through those times, making sure you’re not making an emotional decision based on what’s going on around you, sticking to your plan. That’s the key. So, turn off the news, delete your app on your phone if it’s causing you to watch it every day.
We don’t need to watch your long-term investments daily. That’s huge. You want to come up with a plan, stick to the plan. Kind of set it and forget it. That’s kind of what we say. In April of last year, no, two years ago, April of 2018, Ben Carlson, who we had on earlier, he came on and talked about his book. He wrote that the more you look, the more painful it will feel.
And the reason volatility clusters in the market is because losses instinctively hurt twice as bad as gains feel good. This loss aversion is a big reason why investors tend to make more emotionally charged decisions when stocks are falling.
So Ben, like I mentioned was on our podcast, but he’s speaking about what we know in our industry as emotional investing is you compound. The market may be down 5% let’s just say. The average investor reacts to that and sells, which causes the market to go down more, which causes more people to react to that and sell. And it’s compounding on that pain and it causes more people to make that decision. And it’s true. You feel those losses and even though they’re not real losses, they’re on paper. Until you sell, you haven’t actually locked in any losses or gains, but you feel that downside more than you feel the upside. To lose 20% is harder than to gain 20% from a good side.
Austin Wilson:
That is again, like you said, that is why it is important to work with a financial advisor because they are able to help put your mind at ease, to stick to the plan. And that whatever’s happening right now is only short-term. And if they’re not telling you that it’s impacting your overall financial picture long-term, it’s not. So it’s not worth getting hung up on, but that financial advisor is worth every penny and more than you will pay them in their fees by talking you out of doing something stupid and selling at the bottom.
Josh Robb:
And that’s really is timing is a losing game for honestly anybody, I mean there’s probably people out there that think they can do it and for some time they might. But timing, you have to be right when you buy and when you sell. And that’s a lot to ask somebody to do perfectly every time. And so that’s why sticking to a plan matters. Look long-term. What am I trying to get to? And in the interim, historically speaking, what has gotten people there the most efficient way and the most likely way, stick to that plan.
Austin Wilson:
Stick to it, stick to it, and everything will be just fine. So yeah, kind of going back to volatility, I guess it’s important to remember that you really don’t lose that dime unless lets you sell like you said. And at least that’s what Nick Murray’s book, Simple Wealth, Inevitable Wealth says. Great book, we’ll link it in the show notes. I read that last year and it makes things at a very high level, make a lot of sense and it should for a lot of people, so that’s good.
But he says “The ability to distinguish between temporary volatility and permanent loss is the first casualty of a bear market.” So overall like a 30, 40, 50% stock market drop. Totally not fun. Like no one wants to look at their statements or whatever, but it really doesn’t change your financial situation unless you need that money right now, or if you’re selling at the wrong time, sell at the bottom where or when things are down.
The market will go up over time. We know that because it historically has done that and the US economy is going to continue to grow. And we have great faith in the system that we have in place there. And like I said, this is the reason why working with a financial advisor is a game changer. They can make sure that you’re not making poor choices and selling it bad times and it’s just going to save you a lot of time and avoid you from doing something that can make you permanently damage your plan.
Josh Robb:
Yeah, and a lot of times if you’re looking on the TV or the news, they’re there to sell, advertise. We talked about this in path. They’re there to sell, to get the eyes, to get the viewers. And so what are they going to highlight? This is new, this is something that’s never happened. It’s the markets go up and the markets go down and in the long run, the US economy continues to innovate and grow and that’s what we’re betting on and we’re believing.
Austin Wilson:
And it’s just so funny. If you watch the news, it doesn’t matter who you’re watching. All news is going to be more highly rated as news for the negative stories that they’re putting on there than the good stories. So specifically looking at financial news, they’re going to have a lot more readers, a lot more eyes on the TV when the Dow is down 20% and it’s everything’s flashing red and there’s bears all over the screen, than they are when you’re just slowly chugging along in a nice upward year. It’s not good news that things are going well all the time.
Josh Robb:
That’s boring.
[18:09] – Some (Un)safe Havens During Volatility
Austin Wilson:
That’s boring. So Josh, what do some people tend to take safe haven in when things are choppy and why is that maybe not the best move for your financial plan?
Josh Robb:
Yeah, so like you mentioned, when people get scared. They want out of that volatility. So they want out of the stock market because that’s the volatile piece. That’s the growth piece. Volatility is up and down. So where do they go? So there’s a couple places to go. They can go to fixed income. There’s some volatility there, but it’s less volatile.
Austin Wilson:
And sometimes inverse to the stock market.
Josh Robb:
And so it moves a little differently, uses different reactions to things. And then there’s gold. So the idea there is that’s a hedge against volatility and inflation as well. Gold being a physical limited object here that we’ve attributed to value. So there’s only so much gold in the world that can be mined out of the planet. And so that adds a scarcity to it, which adds value to it.
Austin Wilson:
Supply and demand.
Josh Robb:
And then more recently, apparently according to Austin, which is crazy, Bitcoin has become a safe haven for volatility.
Austin Wilson:
That is so funny because we were talking about how people think the stock market is volatile and they’re flocking to other things. But the truth is that on crazy stock market sell off days where the market’s down 1-2%, whatever. People buy Bitcoin like crazy and Bitcoin goes up more than that. It’s crazy.
But they’re getting out of one thing because of the volatility and getting into something that is actually much more volatile. So it is counterintuitive, but it’s the truth of what people are doing. And have my own opinions on that. I do not think it’s totally a great move. But it’s interesting that that’s what people are doing.
Josh Robb:
Because if you look at the historical volatility of Bitcoin, it is a volatile thing in and of itself.
Austin Wilson:
True.
Josh Robb:
And so to think that that would hold up, and obviously the last one is cash. So I was kind of working down that list. Bitcoin kind of got thrown in there. I think it’s a little more volatile than all those, but they look at that as kind of something similar as a different digital currency I guess in a sense. But cash is kind of the last one. People will sell and sit on cash.
Now historically you could earn something from your cash. Currently you can’t earn much. There’s really not much there. In fact, it’s usually below inflation. And so that’s the downside is if you’re holding cash over time, you’re actually losing value in that cash even though it stays the same dollar amount, what you can buy from that goes less and less every year.
[20:33] – The Best Thing You Can Do: Dollar-Cost Averaging
Josh Robb:
So what do we do? Let’s talk about kind of an idea that you could do during this volatility. So there’s this cool thing called dollar-cost averaging. So dollar-cost averaging. That’s for someone who is continuously adding money into their account. And when I say continuously, I don’t mean like every second you drop a dollar. It means on a periodic plan, some sort of plan. You’re adding money and regardless of what is going on outside of you.
And so you say, for instance payroll. If you have a 401k or something like that, you say, okay, I want a portion of my paycheck withheld and put into my retirement account. That’s dollar-cost averaging because they do that on the pay period regardless of what’s going on. They don’t say, “Oh, the market’s up a lot, let’s not put it in right now.” They say “It’s pay time. You told me to withhold as much. It’s coming out and going into the account.”
Josh Robb:
And so dollar-cost averaging is a great way to take advantage of volatility.
Austin Wilson:
Yeah, for sure.
Josh Robb:
Because what you’re doing is you’re buying every time some set amount of dollars, regardless of it’s up or down. So as the market’s going down, every time you add new money and guess what you’re doing, you’re buying cheaper. Yeah, you’re buying stuff cheaper. So if it was a $10 and now it’s $8 you can buy more. That’s great. So you’re buying more at a lower price.
And then when the market’s going up, you’re buying less, but you’re still adding in. What that does is it smooths out. It gives you a nice average return.
Austin Wilson:
And if you’re invested in multiple asset classes or multiple investments, which most retirement plans are going diversified, they are going to have some level of diversification. Those pieces move differently even regardless of how the market’s moving, those pieces are either going to capture more or less of the upside or the downside, each piece differently. So when you’re dollar-cost averaging, you’re just as you are in over in the total amount. Even within these individual buckets, you’re buying more of what’s cheap and less of what’s expensive. And it’s a beautiful thing and it’s really like, it’s an automatic portfolio rebalancing tool.
Josh Robb:
Yes, it will help your portfolio stay closer in line to what your asset allocation should be or what you set it up as. Now 2019 when the markets are up 30% and the stock market, it could get a little bit out of whack even with dollar cost averaging it. But in general, you’re right, it does help keep you a little bit better balanced through that. And you know, I mentioned a 401k, but you can do that on your own because now with technology, most investment platforms allow you to set up a reoccurring amount.
So you could even say, “Hey, weekly, take $10 from a bank account, move it over and invest it.” And you could set it up to do dollar-cost averaging on your own if you don’t have a retirement plan at work. So there’s a lot of opportunity out there for you to do that.
[23:16] – Is Market Volatility a Good or Bad Thing?
Austin Wilson:
So Josh is market volatility good or bad? And if the constant ups and downs of the market are too much, what can people do to kind of be able to sleep at night?
Josh Robb:
Yeah, so market volatility is neither good or bad. It is indifferent. It was a trick question. It is indifferent. Market volatility is just a part of investing. It is a piece of it that doesn’t go away. You can try to mute it or increase it. We’ve talked about that. You and I just on our own, there’s things out there that you can increase volatility or decrease it.
Austin Wilson:
Correct.
Josh Robb:
In doing so you’re also giving up or enhancing potentials. So you know, you could play with volatility, but volatility is still there. There’s volatility in investing. Historically, the more volatile something is the greater potential of returns. And so you factor that in when you look at asset class in your overall allocation. If you want lower returns, who wants lower returns, but if you’re willing to accept lower returns, you could accept lower volatility.
So a lot of times people in retirement are leaning that route as they don’t like those big fluctuations. They say, you know what, I’m retired. I know how much I need to survive on, I need X amount of returns. I don’t need extra returns above that. And so they can reduce some volatility just to help stomach that ups and downs.
Austin Wilson:
Yeah. Sometimes in retirement specifically, it’s not about can you take on that additional risk to be in more equities or whatever and that volatility, it’s why would you maybe take on the next risk if you don’t have to? If you know how much you need and that your financial plan is set and it should do well to provide for you for the rest of your life. Maybe you don’t, why would you take on that extra risk if you don’t have to? So that’s why some people might achieve less return, but they’re also going to take on a lot less volatility and it will really make them feel a little bit better about how things are.
Josh Robb:
And so in the long run because of the way our market is set up, there’s new information coming in. There’s a lot of people who like to try to play that game of timing, that volatility is what they’re playing into. That’s really what they’re anticipating is I’m going to buy now before the volatility kicks up on the plus side and I want to sell before the volatility kicks in on the downside.
That’s the timing aspect of it. We think you accept market volatility and again going back to Austin’s stats, the longer time frame you have, the less that volatility matters. Volatility is a short-term issue. If I am looking at a 15, 20 year window, those ups and downs, even those 20% drops that will show up throughout there are less impactful because compounding is stronger than that volatility.
Austin Wilson:
So I mean I guess it kind of depends on your age and where you are in your investing, but young people specifically, first of all should not be scared of volatility because of the dollar-cost averaging aspect. If you’re systematically putting money into the markets on a set amount, a set timeframe, you can take advantage of volatility. And you have a long time horizon where taking advantage of that volatility will benefit you. So the younger you are…
Josh Robb:
The more you should hope for it downward movement of the market.
Austin Wilson:
Yea, actually it was think it was in that Nick Murray book that we talked about also, but he said that the younger you are, the more you should hope for long and deep bear markets, which sounds counterintuitive because no one wants to lose money on paper, but you’re buying things so low and that’s going to impact you more in the long run when those things grow over time.
So yeah, the younger you are, I mean Josh and I would probably say not every single person in the world, but the majority of people who are saving for retirement that are going to need that time to do that, they need to be 100% in equities when they’re young because that is the only way that they’re going to grow to achieve their goals.
Josh Robb:
I mean obviously it depends on your risk tolerance because what it all comes back to is how can I stomach this when the volatility hits? Because you’d never want to be invested too aggressively where you’re going to panic and make some moves. So as aggressive as you can be, that’s how you should be invested as a young person. Because that’s the compounding is huge. The more time I allow my money to work, the more that will grow.
So a 20 year old has more ability to grow their money than a 30 year old does for retirement. Because of that 10 years, that one decade difference is huge. A 20 year old to 30 year old is bigger than a 30 to 40 year old. So the again, the closer you get to retirement, the less your money has time to grow. So the volatility is a big factor in the closer you get to retirement.
Austin Wilson:
And as you get closer to retirement, you need to know that you’re going to be using that money to live. So it’s natural. And a lot of financial advisors advise their clients to slowly bleed off some of that equity exposure and put it into something that’s going to be a little less volatile as they get closer to retirement and they know that they need that money before long because they don’t have that time if there was a big drop to recover it. So volatility I like Josh said, it’s not good, it’s not bad. That is the nature of specifically the equity markets are the biggest example of this, things change all the time and stock prices change all the time and people feel it.
But the truth is that it presents a lot of opportunity and like Josh said, if you have problems with that, first of all be sure to talk to your advisor because they will be able to help you out. Second of all, just try not to look at things as much because those are things that can really make a difference in really your comfort level with where you are at in your financial plan.
Josh Robb:
Yep. So you know, thanks for listening to this. Volatility is a fun topic.
Austin Wilson:
Although admittedly it’s a lot more fun to talk about when you’re not experiencing a bear market. But nonetheless, volatility is, it’s timeless. It’s just the nature of the beast with equities and that’s kind of what we’re dealing with right now. So, yeah, Josh, what do we do in these times of volatility? What do we do with our money?
Josh Robb:
We’re expect to invest money when we have that and grow it as the market recovers. That’s how it works.
Austin Wilson:
Speaking of growing it, we need your help to grow this podcast. So if you like what you’re hearing, we are thankful that you’re here, but we’d appreciate it if you’d subscribe. And if you really like it, leave us a review on Apple Podcasts. Don’t forget to email us any ideas that you may have for topics or questions or anything you’ve got to hello at theinvesteddads.com. We also will read your dad jokes if you send those in.
Josh Robb:
That’s right.
Austin Wilson:
Send those in too and just be sure to share this episode with friends and family if you enjoy it. All right, thanks. Have a great week.
Josh Robb:
Yep.
Austin Wilson:
See you later.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended but your journey towards a better financial future doesn’t have to head over to the invested dads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode.
Josh Robb and Austin Wilson worked for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher capital management.
This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
