My mom and my late father were never fans of the stock market. My dad lost a lot of money early in his adulthood in the stock market and never wanted to go back. They ended up investing slowly in real estate, buying a few houses that would become rental income.
But late in 2020, as my mom was lamenting that interest rates on her CDs at the bank were so incredibly low, my sisters and I convinced her to take some of her savings and put it in mutual funds.
If you’ve got mutual funds, you know what’s happened. Up and down, but mostly down.
My mom hasn’t been a happy camper as I’ve tried to tell her that mutual funds in the long run — with time — should do better than that money in a CD earning next to nothing. But of course, there is risk, and these days with headlines about inflation and the Ukraine war and soaring gasoline prices, it makes my mom nervous.
I spoke recently to Jesse Hurst, president of Impel Wealth Management in Cuyahoga Falls to get some financial advice for readers.
I started by telling Hurst, who has more than 30 years of experience in the industry, about my mom.
“We’re having conversations with people now that we haven’t had in 20 to 25 years about proactively managing different types of risks, including inflation risks,” Hurst said. A lot of people and even younger financial advisers, haven’t lived through inflationary times like we are seeing now, he said.
Hurst said he’s been talking to clients about inflation-adjusted economic numbers.
“People see their personal incomes are up 5½%, but if inflation is running 7½ or 8, on an inflation-adjusted basis, real incomes are down 2 or 2½%. If you’re lucky enough to earn 1% on an interest-bearing bank account, but inflation’s up at 8, your real return is negative 7.”
So in my mom’s situation, while she is “comfortable” thinking her money is safe in the bank (though she wants it to grow more), Hurst said with inflation and paying taxes on any interest, she’s really losing money.
But people don’t look at it that way, he said.
“They know they’re almost guaranteed in that situation to lose 3, 4, 5% in real purchasing power — or how much in gasoline and eggs and milk and stuff I can really buy. It’s like losing 3, 4, 5%, but they don’t look at it as the same level of risk as volatility in the stock market,” he said.
Risks work on both sides
Investors take a risk with their mutual funds or 401(k) plans for their funds to go up and down. When the market is up 20% to 25%, people say they’ve had a good year, said Hurst.
“But in years like this year — where you see since mid-November when both the NASDAQ and the Russell 2000, the SmallCap index were at their low in late February and they were off almost 25% each — then all of a sudden that’s ‘risk,’ but it’s risk on both sides,” said Hurst.
“To get the plus side of risk, you have to endure the temporary negative sides of risk as well.” he said.
Hurst recently talked to a client who is about four to five years from retirement.
“He said, ‘I won’t even look at my 401(k) statement.’” But he downloaded it to look at before his meeting with Hurst.
“All it did was make me depressed,” the client said.
Hurst said the COVID crisis was very unusual with a 34% drop in the S&P 500 from Feb. 20 to March 23 (2020), “but between the CARES (Coronavirus Aid, Relief and Economic Security) Act and the Federal Reserve Bank kind of opening the floodgates of liquidity, the market started to rebound pretty quickly as the Fed and the federal government put massive monetary and fiscal stimulus as a floor underneath the economy and the markets,” he said.
Hurst said to look back to 2000, when the dot-com bubble started deteriorating and then in 2001, 9/11 happened and then in 2002, the Enron/WorldCom financial scandals broke.
“So from March of 2000 to October of 2002, we went through a 47% drop. What was really difficult for people was in that 2.5-year period of time we had, let’s say, eight out of 10 quarters (this was when people got quarterly statements and fewer people were looking at their accounts online), their statements were negative. Psychologically, that’s really hard. It’s like death by a thousand cuts, whereas COVID was one big swoosh down and then things started to bounce back,” he said.
“I remember clients walking in ’01, early ’02, after they’ve been through six, seven, eight quarters of this and they’d flipped their 401(k) statement on my desk and they’d say, ‘Look at this!’ And I pick it up and I’d say, ‘This looks great!’ and they go, ‘What are you looking at?’ And I said, ‘Well, tell me what you’re looking at’ and they always point to their account value. ‘Look how much it’s down.’ I said, ‘You’re looking at the wrong column.’”
Hurst told them that the price of what they were buying was on “sale.”
“One of the things that Warren Buffett is known as saying is that Americans love to buy everything they buy on sale other than their financial assets,” he said.
Time is on your side
Time is your friend with investments, Hurst said.
“The longer your holding period, the more likely you are to benefit from returns. But the only way you get the positive return is to hold on and wait for that return to come back.”
Hurst said often, the average person might be freaked out by looking at their IRA and its ups and downs, “but generally they don’t freak out as much about their 401(k). You very rarely have somebody say, ‘Well, the stock market’s down, so I’m going to stop putting money in my 401(k),’ ” said Hurst.
“It’s kind of preprogrammed and just on autopilot. So every time the stock market goes down, they just buy more shares and those shares that they bought now didn’t drop, they just bought low. And when the market rebounds, those bounce back up,” he said.
“You’ve got to match the risk level of your portfolio to the duration of the need,” he said.
If you have a 15-year-old and you’ll need the money for college in four to seven years, that’s going to be allocated more conservatively than money if you’re 45 years old and you’ve got 20 years until you need it, he said.
Life is broken into two segments, Hurst said: the accumulation phase of life, which is from the day you start working till the day you retire, and the distribution phase of life, which is from the day you retire till the day you die.
“Using my son and daughter-in-law as an example: They are both 29 years old,” he said. “They’re both in corporate positions. They’re both doing extremely well, so for them short-term risk and volatility is not nearly as big of an issue as ‘Can I get the best rate of return on these dollars so I can compound and grow them during these accumulation years as much as possible?’ — (that) is the highest priority.”
Hurst has many clients between ages 55 and 65 who feel they have to get conservative as they near retirement.
“But if you look at the average married couple, both age 65, based on current life expectancy numbers, there’s a 50% probability that one of them will make it to age 90. So that means if you’re 60 or 62 or 65 years old, this is still a 25- or 30-year time period,” he said.
So if you get too conservative too quickly, then you run the other risk, which is as inflation goes up you’ll need more assets or a greater rate of return for your retirement fund to create the same standard of living, he said.
Bond maturities may need adjusting
Bonds have typically been a safer way for investors to diversify their portfolios with stocks. Often, investors who want to get more conservative will reduce their stock exposure and increase their bond exposure, Hurst said.
But at a time when interest rates go up, bond prices fall.
Without getting too technical, Hurst describes a teeter-totter analogy. The farther out from the center of the teeter-totter, the more you move up and down. Similarly, with bond rates, a one-year bond moves less than a three-, five-, 10- or 30-year bond.
“So one of the ways you reduce risk is to shorten up your maturities of your bond portfolio pretty dramatically,” he said, adding that this advice might be more for clients who have more money in their investments. “You can manage that risk by shortening for whatever portion you are keeping in bonds.”
Is now the time to invest?
I asked Hurst what advice he had for people who haven’t yet invested, but may have some money to do so.
“As long as the timeline isn’t too short, if it’s money, they need three, five or 10 years from now or they are moving toward retirement down the road, it is always better to buy when prices are lower,” he said. “However, I wouldn’t jump in all at once, but I would make a series of deposits while the market is down. I always love buying when things are cheaper.
“At the end of the day, your investment portfolio should match your long-term goals. You should not be making radical adjustments to it in response to the news and noise of what happens on a day-to-day basis,” he said.
“Time in the market instead of timing the market is what is most critical to your long-term success.”
Beacon Journal staff reporter Betty Lin-Fisher can be reached at 330-996-3724 or [email protected] Follow her @blinfisherABJ on Twitter or www.facebook.com/BettyLinFisherABJ To see her most recent stories and columns, go to www.tinyurl.com/bettylinfisher