Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC, investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Gary Determan:
First Wednesday of the month, so we’re going to go live to the bottom of the hour. Dave Nelson joining us via phone. You’re always busy, Dave. What you doing today?
David Nelson:
Just running all over the place. I’ve got a couple meetings in our Quad City office this morning, then I’ll be making my way back to the Clinton office and then I have afternoon meetings, and I’ve got a late one tonight. So about 6:30, I’ll be starting my last appointment. Some folks up in Wisconsin area that have been longtime clients. That’s part of it and I enjoy it, so no belly aching. I’m very lucky.
Gary Determan:
Another half day, 12 hours, right?
David Nelson:
Exactly. I used to tell people that and I tell my basketball players that as well. One of the gals one time made a comment that I was at practice routinely at four o’clock and she says, “Geez, it must be nice. You don’t have to work.” I said, “I just work half days, 12 hours.” When most people think half days it’s a four hour shift, but the reality is there’s a lot and some of what we’ll chat about today is just that big picture of what’s taking place and the concern that continues out there as far as what direction is this market going to cut loose and move in. There’s again, probably half the folks out there that believe we’re going to go up and you got half the people believing it’s going to go down as far as even further than what we are at right now.
So it’s a dilemma and again, I’ll kind of drill down and give maybe some stats that might help people as far as feel a little bit better as far as about what’s happening but by no means are we talking about this thing as the sky’s the limit at this point in time. There’s some issues here, and they’re global issues. We talk about inflation a lot with clients, and as far as, depending on where people stand politically, we can take that thing and twist it whatever direction that people want but the reality is that this is a global issue and ever since we started quantitative easing, which was, maybe people remember that term, it started back in ’07 and literally went up until just recently where we were essentially issuing bonds and buying bonds back as far as the government and with the idea of trying to drive down interest rates, which would cause people to go out and spend money and get the economy cranking and so that’s been through Democrats, that’s been through Republicans.
So when people start trying to put a twist on it, I always push back and say full parties are responsible for these decisions as far as artificially keeping interest rates at the low level since subsequently creating a bubble, which nobody wanted to discuss along the way, but the reality was that’s how it took place and now we’re dealing with it and it’s not going to go away overnight. So again, our job, like always, continues to be to try to figure out how do you make the money without sticking your neck out too far and it continues to be a challenge. It’s a little different challenge today than it was a year ago, but nevertheless, it’s a big challenge.
Gary Determan:
Again, visiting with Dave Nelson. Dave, I know you pay a great deal of attention to the market, but what about what the consumer is doing, does that play into what you guys do?
David Nelson:
Yeah, it really does because the consumer in the United States is 70% of basically the GDP. So it’s a big, big percentage. So watching the consumer, what’s the consumer doing is very, very important and the consumer’s been very strong and again, there’s arguments as far as in this area as well is that it’s some of the money that basically was doled out when we went into COVID that there’s estimates that it’s over a trillion dollars that’s still sitting in, in essentially money market checking accounts. In other words, in average people’s savings account that they didn’t have prior to this money being doled out and so because of that, we have those individuals that are in a better financial position and subsequently they’re out spending money that again, normally they wouldn’t be spending.
So even though we have inflation and prices are going up, these individuals have a little extra cash sitting there and they’re starting to spend that money down and so again, that’s one argument. The other side of that coin is that no, you’re measuring it incorrectly as far as what these individuals actually have. We’ve got a bigger problem than that you think, and they don’t have this trillion dollars sitting on the sidelines and by the way, when we bring up these numbers, this is one of the other things that always make sure to point out to people is that it’s typically, when we think of that, most people kind of think of it a trillion, and then it’s just proportionally everybody has pretty much the same. We all know that isn’t true if you’ve got some individuals that have maybe every penny that they’ve ever made, and then you have other people that have spent everything that they’ve ever made and or that came through some of the government programs.
So it’s hard to say, Gary, we don’t know for sure but when you look at what’s taking place as far as at the level of stores and things that people would be spending money on, those numbers still look pretty strong and again, because of that, inflation is very stubborn and inflation numbers aren’t coming down nearly as rapidly as what the government was hoping for and so again, the recipe then seems to be one thing and one thing only and that is we have to drive up, and I am stating this correctly, unemployment. We have to drive it up because we have too many people employed making too much money subsequently spending that money and you’ve got a lot of money chasing less goods subsequently supply and demand that drives up prices and we have problems. So the answer to that from historically, the answer has been, you got to get unemployment up. It’s got to be higher, which just sounds crazy when we talk to people about stuff like this.
So again, I’m just telling you out there, I’m not advocating this by any means. I’m just telling you as far as the thought process with interest rates being increased, and increased at the pace that they have been. I mean, we’re talking about massive increases in a very short period of time. I was watching this morning again, this exciting stuff that most people out there would rather do anything, but I had Bloomberg on this morning, they’re showing the 10 year German bun, so it’s equivalent of our 10 year bond and that was almost a negative one, negative and I am stating that correctly too. A negative 1% give or take a year ago and today it’s at 2.68.
I mean, that’s just a massive increase and again, what’s the objective? What’s the goal? Why are they doing this? It’s to try to slow down the economy in Germany, in Europe, et cetera, et cetera, just like we’re doing here and inflation is just a terrible, terrible thing. It just really causes a lot of people as far as to go to the pump or anything that they purchase higher and higher prices, which puts a lot of pressure on people and so the goal is to try to drive it down and again, the method historically has been raised rates that’ll cause more people to cut back on their spending. Subsequently, we won’t need as many people working. Subsequently, that’ll help as far as this inflation problem. To date, it really hasn’t really put much mad dent into it and we’re hopeful that some of this stuff, the lag effect will take care of it and we won’t have to increase interest rates much more as far as than we’re there right now
Gary Determan:
And visiting with Dave Nelson. We’re going to be taking a break for the weather here in about three, four minutes. Dave, I don’t follow the market nearly as close as I should or as you do but it always seems to be like it’s up one day down the next and just kind of a lot of fluctuation? Am I reading into this wrong or is that taking place?
David Nelson:
No, statistically you’re right. I mean, when you look at it, the market is up roughly not quite 60% of the time and down 40% of the time. So you’re right, and what gets our attention, I mean everybody, we don’t mind volatility when it’s up volatility. We do mind it when it’s down volatility, and so it gets people’s attention and what’s front and center in the last probably year and a half, give or take, has been inflation and the impact that it’s had as far as on the stock market and so people’s 401ks, as is the statement that’s made oftentimes on programs is no longer a 401k, it’s a two 201k, which is a fancy way of saying that you’ve lost a fair amount of money during this window. That’s partially true and to get back to your original statement, question, statistically 60 40 is pretty much the bet there but again, when we look at the moves up versus the moves down, the moves up incrementally are smaller than the moves as far as on a daily basis down.
So again, doesn’t always hold true. We’re talking about long-term stats, and what I would advocate and tell people, and what I’ll get into in the second half here is really drilling down on the importance of understanding how to protect capital during periods of time like now and one of the statistics we’ve always spoken about as far as in the program is that if you have a block of money and you’re up 50% one year and then the next year down 50%. On the surface, it feels like you’re whole, but you’re not whole. If you had $100,000 and it went up 50%, you’re at 150 grand and if it then drops 50%, you’re at 75 grand.
Well, that I think more and more people are getting, but the problem is with the people that we typically talk to, they’re up in the years in the bottom line. They’re drawing checks as far as from their investment account. So when you’re down and you don’t have to be down 30% or 50%, when you’re down 20% and you’re taking a distribution out of there of say four or 5%, you got problems and so the key is to predict that principle and the impact that it can have is much more severe as far as than what people think.
Gary Determan:
Okay, before we do take the break for the weather, again, we’re talking to you via phone and you’re visiting with folks down in the Quad City, you’ve got people coming in. The importance of meeting with some of these people face-to-face, Dave?
David Nelson:
It’s crucial. I’m old school. Zoom meetings… I mean, we’ve got clients in 40 plus states, so we do do some Zoom meetings. They’re just not the same and the phone call just isn’t the same. Sitting face to face with people and seeing how they’re reacting to some of the stuff coming out of our mouth. The goal is to make sure that people get the concept. Again, they pay us to worry about the details, but I want them to understand the concept and sitting in front of people, making a statement and looking them in the eye really tells us a lot as far as did they get that or do I need to go back and go through that again.
The people we work with as a general thumb are pretty bright people, but this isn’t an area that most people spend a lot of time paying attention to and subsequently, they’re not well informed as far as in this area. So the goal is to try to get them to that level that they want to get to as far as an understanding of it and most of our clients, quite honestly, they want to get the concept and then again, you worry about all the other details.
Gary Determan:
All right, very good. We’ll be back with more on Financial Focus with Dave Nelson. A check of the weather, brought to you by Morrison Community Hospital.
Andrew Stutzke:
The best weather of the week, arriving today with a mostly sunny sky this morning and becoming partly cloudy this afternoon. We’ll see temperatures into the upper 50s with some windy conditions. Tonight, mostly cloudy, dropping to 33 for overnight lows and for Thursday, mostly cloudy skies continue highs in the upper 40s with your Storm Track 8 forecast, I’m your meteorologist Andrew Stutzke.
Gary Determan:
Partly cloudy skies. We do see the sun. Our wind’s right now out of the southeast, current temperature, 43 degrees. Our update brought to you by Morrison Community Hospital. The Morrison Community Hospital is proud to announce two new services. Their a neurologist. Dr. Ahmad is now performing in-home sleep studies. As the name suggests, the sleep apnea test is done right in the comfort of your home. This procedure tracks your breathing, oxygen levels and breathing effort while asleep in your own bed. Dr. Ahmad is also providing clinical Botox injections to prevent migraine headaches, alleviate excess sweating, and to prevent muscle stiffness or spasms. Call 815-772-5564 to make an appointment with neurologist Dr. Ahmad.
NelsonCorp Wealth Management presenting Financial Focus, first Wednesday of the month. So we’ve got Dave Nelson on the phone. We’re continuing to the bottom of the hour. What are we looking at in the second half of the show, Dave?
David Nelson:
Well, a whole bunch of stats, and I think that as bizarre as this may sound, if individuals are at home or at work and they can just grab a sheet of paper and write some of these down and I’m serious when I say that, if you’re able to. I’m going to try to summarize, I’m going to throw a fair amount of stats out and just get some different concepts and you can jump in anytime, Gary, and if it needs to be clarified, but the Fed is at some point, we’re talking about a pause. So the Fed increasing of the interest rates. People are betting and hoping that this pause is coming here shortly. Just to give you an idea, the average when they do pause and we go back and we look at the history going back to 1980, when they do pause, the average return 12 months later is 15.7%.
So again, just one of those data points to say it’s all not gloom and doom when they do pause. David, you didn’t tell us when that’s going to happen because I don’t know. Nobody knows for sure, but we’re hoping that that pause takes place as far as within, give or take, probably the next six months. The other thing that’s worth pointing out is when we talk about recession, because there’s a lot of discussion about recession and the term, I brought this up before, whether they call it a recession or don’t call it a recession, just kind of look around and see as far as how things are operating right now, chances are recession is pretty much, I won’t say a hundred percent guaranteed, but the definition changes and that’s why it’s kind of tough as far as to make this statement but again, another stat worth noting is one year after the recession, the returns are almost the same as what I just brought up after a Fed pause.
So 16%, that’s after one year. The average over three years, looking at it on a cumulative basis is about a 30% return. So point being, again, if we’re patient eventually, if history repeats itself, this is how we’re going to be rewarded. So a couple other things just real quick here that I think are, again, worth pointing out, and this is kind of the other side of the coin. If you look in the rear view mirror and you look at what we define in this industry as kind of the starting spot for most people, a 60 40 portfolio, meaning 60% of your assets, whatever, I’ll use 401K as the example here 60% is in ownership stuff. Another way of saying stocks in real estate, and then you’ve got 40% in other types of stuff, so-called safer stuff, which would be the bid bonds in cash.
So again, 60% in ownership, 40% in that other stuff that so-called safe stuff. If we look over a 10 year period, the last 10 years, that mix has generated a return of 10.4%. So over 10%, nice rate of return and again, we’ve been in environment where stocks have really been out of fire, a lot of that return didn’t come from the bond arena, it came from the stock arena. Now that’s the rear view mirror. Now we want to look forward and we want to look at periods of time like we’re in after we had the stock market, have some big, big years, and they ran really, really hard and in a period where interest rates are probably trending up, what do the returns look like as far as that environment and so there’s some big companies, JP Morgan, Goldman Sachs, BlackRock, State Street, these are mega money management firms that have a lot of really, really smart people; PhDs, CFAs, a lot of smart people and their job is to try to look into the future to say what’s realistic as far as going forward.
So that same 60 40 portfolio that averaged over 10%, the prediction going forward is more like six and a half percent, six to be exact if you look at the average from those four different entities. Again, it’s not to say that we can’t do better. It is to say that if you invest in a 60 40 mix and you put it in and you hold it, their prediction is the average over this next 10 year period of time would be give or take, six and a half percent. So again, nobody knows for sure, but what we do know, what we believe I should say, I want to clarify that what we believe is that stock investors have been overpaid pretty substantially, primarily stemming from technology type stocks that are in a lot of mutual funds out there that people own and the bottom line is they’ve done really, really, really well up until recently and so they’re not doing quite as well now and subsequently, that’s probably going to pull down returns.
Last item, Gary, and I’ll promise I’ll zip it. You can ask away, but this one is the mathematics of a loss. That’s what I brought up earlier just before the break, where an individual, and I’m going to use an individual that had some type of combination of money, stocks, bonds, whatever, and they had invested it and during this last window, in other words we’ll just use, last year they were down an EVA 20%. Also, those individuals were taking and continue to take a 5% distribution in order just to get back to where they were assuming they were taking no money out, they dropped 20%, they’ve got to make 25% just to get back to where they were.
Hopefully everybody’s got that one. You dropped 20, you got to make 25 just to get whole again but let’s throw in that extra 5% distribution per year. How long is it going to take you as far as to get back to your money and more importantly, what rate of return you need to make and the answer is, and don’t fall out of your chair folks when you hear this, these are the facts. This isn’t a gas. These are the facts. You need to make 62%, so a 20% drop and a 5% distribution, I’m going to be paddling upstream for a long, long time. It’s going to be very, very difficult. Oh, I need to make 62% to get back to where I was.
That’s why it’s so crucial when we talk to people about protecting capital. It isn’t just willy-nilly. For years I’ve heard this, you just put it in and more or less you fall asleep and over time, you’re going to be okay and again, there’s case after case after case that that’s not true. History has shown that the market goes up over a period of time, but history always also shows that there’s been numerous periods of time where a 5, 10, 20 year period of time has been very taxing. Most recent that I’d like to point out to people is the NASDAQ, which in the year 2000, if you bought it in 2000 and you took the ride down, and by the way, the ride down was 82%, it took you 16 years just to get a hold, assuming you’re not taking any distribution. I mean, people just aren’t aware of that and so that’s why it’s so crucial that people get it and they understand they need a strategy to try to protect capital. It doesn’t mean buried in the backyard. Again, when I started this industry, people were getting 15%.
They didn’t need to invest, they just put it in a CD and got 15% but in the world that we’ve been in the last 10 years where rates are pretty close to zero and they’re now going up a little bit, bottom line, people have to invest. The key is they got to know how to find that proper mix for their situation, and they need to understand that you just can’t chuck something in and just hope that it works out. We need to be proactive and again, that’s our role that is in the client’s job, but we need to get the definition of what that means to them so that we can incorporate that on their behalf.
Gary Determan:
Again, visit with Dave Nelson. Dave, those are amazing statistics, and it’s obvious that you and your group do their homework. Where do these numbers come from Dave?
David Nelson:
So you got a lot of smart people out there. We buy data from, as we call it, nerds, and these nerds sell us nerds as far as the data and the data’s then… The goal is to try to apply it in their particular situation. The challenge, Gary, for most people is that they just get… This isn’t a area they like, and subsequently it is something that they just kind of keep putting it off. It’s like drafting a will or a trust, you know, got to push people a little bit oftentimes as far as to get that done, it’s crucial. You got to have it. Nobody wants to think about it, but you need it and in the world that we live in day to day, people don’t want to think about this stuff because it’s kind of confusing. I try to break it down and stocks, I think people, big picture get the concepts and so I just try to break it down in terms of owning a home and when you own your own home, do things always go right?
No, occasionally the furnace blows up, you got to get a new one. The roof, we got to replace every so often, and that’s kind of the way that the stock market works. Over time, historically, you’ve done okay, but you’ve had periods of time in there that were kind of rough. Now, contrast that to the other side of the coin when we talked generically, and I got to be real careful how I word this one, but historically, when you put money into bonds, you didn’t have a lot of downside risk. You have incrementally a little bit more today than you did. Nothing like the stock market but nevertheless, you can lose money as far as in it. I refer to it kind of like renting.
So instead of, again, overwhelming people, if you ask them how, what’s the bond and how does it work et cetera, et cetera, most people, “Oh gee, I don’t really know. I think it’s something you buy from the government, they pay you interest. Isn’t that the way it works?” Well, that’s kind of, that’s one. There’s corporate bonds, there’s different type of bonds as far as maturities and interest rates, and there’s just literally thousands of different variations but the reality is overall they’re a little safer and than stocks. So when we talk about, again, these stats and trying to apply it to a client situation, the first question typically out of my mouth as far as when I talk to people is how much money are you giving me permission to lose on your behalf and then as they pick themselves up off the floor and say, “What did you just say?”
I say, “Well, truthfully, that’s what takes place.” People in our industry like to show charts and graphs of, if you handed me 10 grand here today, today you’d have $6 billion. I mean, it’s just, it’s crazy stuff and it’s not reality. So reality is that things don’t always go up and reality is sometimes your timing can be really bad. If you retired in ’07, just before the last financial crisis, you got crushed, you went back to work, you’re working at the Super Wash, not because you want to, but because you have to. So these data points are really crucial, Gary. We buy a lot of the data. We don’t have time to do all the number crunching these people do. We buy it from them and then again, our job is to apply it in client situations.
Gary Determan:
Well, you guys do a great job about it. There’s no doubt we got about a minute or so left in the program. What are you going to close with, Dave?
David Nelson:
I think the biggest message is to understand, get a better understanding of what you own, challenge the people that you work with as far as and push them as far as what’s the downside potential of the investments that I have today. Push them for a number and again, to me, the big thing is that we have to acknowledge that there’s still a fair amount of risk that’s out there. I’m not saying put your money in the backyard. I’m not educating, buying a whole bunch of guns and canned food and whatever. The world’s not coming to an end but you need to know how much additional risk that you have and if you can’t get that, and by the way, if it hasn’t been shared with you in the past, that isn’t a good sign to begin with. So look around, talk to people, get some advice. It’s your money. You’re entitled to get a better understanding and individuals, as far as in our line of work should be able to provide that to you.
Gary Determan:
As always, great hearing from you, Dave. Thank you so much. Have a good day.
David Nelson:
You too, Gary. Thank you.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker, dealer member FINRA, SIPC, investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.