What Should You Do During Market Volatility | Brandon Averill, Justin Dyer | AWM Insights #79
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Episode Summary
With recent market dips, a common question that arises is: what causes market volatility?
The answer is a complex set of circumstances determined by many market decisions, but the real question lies in what you as an investor should do in times of market volatility.
Many headlines will prod a doom and fearful response, but what does the evidence show?
In this week’s episode, Brandon and Justin discuss the many different factors that can cause market volatility and the best approach to getting the returns you deserve, tuning out the noise in temporary market downturns, and investing for decades with a portfolio structure built to meet your priorities.
Episode Highlights
(00:33) The news you should know: mixed economic signals before next Fed meeting, Biden’s proposed tax plan, Microsoft’s share buyback program, Federer’s IPO, Amazon offers college tuition at select schools for employees.
(5:59) What’s going on in the market today?
(7:29) Complexities of market volatility?
(9:58) Guessing how many jellybeans are in the jar
(11:46) The perils of market timing
(14:23) You might get it right once or twice, but is it a repeatable process?
(16:16) The good news is that you can participate in the greatest wealth building tool ever created
(17:54) Measuring success in decades
Stay Connected
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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
+ Read the Transcript
Brandon Averill (00:00): Hey, everybody. Welcome back to AWM Insights. It's your host, Brandon and Justin. We're missing Eric, but we'll carry you through today. As you know, each week we cut through the noise that Wall Street is trying to sell you. And we're trying to bring you the knowledge, skills, and access that you actually need to invest like a pro. And today we're going to tackle a topic that's very interesting, volatility. It's been muted, but just in case it starts to come back, we want to make sure that everybody's ready to go. But before we do, let's recap, what's going on in the market?
Justin Dyer (00:33): Well, I think it's fair to say there's lots going on, not just in the markets, but around the world. And one thing I love about finance is you can say everything comes back into the markets at one point or another. I think the biggest thing to highlight is the last couple of weeks in the market, US markets have taken a little bit of a dip over the last two weeks. And as of this recording looking like we're going to close with a second straight down week in the market. Interest rates are jumping and really investors are pausing, looking at some mixed economic data. Although the trend is still positive, it does seem to be weakening. Whether that's because of the Delta variant or just coming off of this incredible bounce from the bottom, who knows. The Fed's meeting next week. That could be a big policy meeting or a big meeting with some critical policy announcements.
Justin Dyer (01:30): So lots of, kind of uncertainty filtering out there. And also we've seen seven straight months of appreciation in the market. So like we've mentioned, I think in the last couple of weeks, having a little bit of a pullback and I mean, we're talking pretty low pull back so far is healthy for the markets. It's what you would expect. We're going to talk a little bit about volatility, right? That's part of investing, uncertainty volatility, risk, if you will, which we've also talked about a lot. It just, it's what you expect to put your money at risk, right, into the market.
Justin Dyer (02:09):
Then the big news I think potentially is house Democrats coming out with a new tax plan. I think there's some pretty important data points within that. We'll see if it actually gets passed. There's been a lot of talk around this whole topic since Biden has taken over and nothing's really been able to get across the finish line on it yet, but this is somewhat of a compromise. So we'll see. From a company standpoint, Microsoft coming out with a huge share buyback program, as well as increasing its dividend. So pretty confident there. You can take that as a sign of confidence in the price of its shares. Right. There going into the market literally buying shares, bringing it back onto their balance sheet. And so they're confident in making that move Then-
Brandon Averill (03:01):
And I think, real quick on Microsoft too Justin, I mean, to me, when I heard this, I thought it was fascinating, right? If you're one of these, you hear all these fear mongers that are out, there, valuations are out through the roof. We got to be on the sideline, keep fresh capital. The Fed's going to cut. Market's going to decline, et cetera. But then you see Microsoft, they're not dumb. Right. They know their company better than anybody. They're turning around and buying $60 billion of their own stock. I think we'll get into this later I know, but I'd just love a quick comment on, isn't this evidence on a why it's so hard to time things and try to pick things?
Justin Dyer (03:38):
Yeah. I mean, exactly. And not only is it a sign of that, but that's their largest repurchase ever, which is also a sign. We're not saying go out and buy Microsoft along with them. I mean, we talked plenty about single company risk and the disadvantages of that. But yeah, it's a great point on how hard it is to make a call one way or the other. I was reading something yesterday, a strategist from JP Morgan basically said the exact same thing. He's a strategist, this is his job, but he acknowledges, kind of talking out of both sides of his mouth, hey, it's incredibly hard to predict these things right now. This is kind of what I think. I'm bullish. But there's so many factors.
Justin Dyer (04:18):
Couple of other really interesting things in the sports world, Roger Federer's back shoe company on what public is at a $6 billion valuation. So the athletic market, athlete leisure market, whatever you want to call it is still very, very, very strong clearly. Amazon coming out in trying to recruit talent by offering college tuition at select schools for 700,000 employees. I mean, that's amazing. It's a pretty tight labor market. We're not back to where we were pre COVID, pre pandemic. And there's some interesting things going on there, but it is certainly hard to find help. And companies are trying to get creative in attracting the employees that they need.
Justin Dyer (05:05):
Lastly, lots of news, obviously this week, but lastly, I think it's also worth pointing out how the US, UK, and Australia are kind of coming at China in a unified front. They came out with a huge security deal to really have that unified force within the Pacific. Then China goes the next day and tries to join the transpacific trade partnership as well. So lots of interesting things going on in the market, lots of interesting things going on geopolitically as I'm sure we're all aware of. But how this all impacts the market, will volatility increase, et cetera, et cetera. At the end of the day that the short answer is it's incredibly difficult to play that game. And we're going to talk through a little bit of why that is the case.
Brandon Averill (05:59):
Yeah. I think that's a great point, Justin, and let's dig in there. I mean, I got a question earlier in the week from a client that was, Hey, what's going on with the market today? And I kind of chuckle. And to be fair, right, that's a very valid question. It's uncomfortable, especially when we've seen kind of markets at all time highs. And then we see a day where the market declines, 0.6, 1%. I mean, that's a big move that generates some internal, and then you click on Bloomberg, you click on Yahoo Finance, and what's their job? Their job is to instill this anxiety and keep you there, right, so they can post all their ads. But when we look at stuff like that, it's like, okay, well, there was a positive retail sales print, data release.
Brandon Averill (06:46):
And so it's like, oh shoot, intuitively I think, okay, that's got to be a good thing. Good thing for the economy. Right. But markets are down. So what's going on? Well, you have to extrapolate that good data now means that the Fed might end their bond buying purchase program and that's related to interest rates. And so you have all this interwoven web. Right. And so I think, maybe speak a little bit about, I'd love your take on. That just to me illustrated how incredibly difficult this is, is that it's not so simple as like, okay, what actually makes the market go up, what it makes the market go down. It's not always, oh, positive information, market goes up, negative information, market goes down. There's so many tangents that it all could take.
Justin Dyer (07:29):
Yeah, totally. I mean, the way I always try and think about it and or frame it in conversation is to, and you were alluding to it, is just think about this economic system or the financial system as a whole, that we have both in the US and around the world. It is so incredibly complex. The number of variables that are inputs to the outputs. Right. Which effectively our stock prices at the end of the day, at least what we're talking about right now, maybe bond prices in a different conversation or private company prices, but let's just stick with stock prices for this conversation. There are so many incredible variables that go into that equation. I mean, just to highlight a couple of things that we've talked about, which is barely scratching the surface. Okay. Well, Microsoft is seemingly bullish about their company.
Justin Dyer (08:19):
They're buying their stock. They are going into the market and buying their stock. Meanwhile, tensions are increasing within the Pacific Ocean region with the US, UK, Australia entering into this big security agreement for the US to sell submarines to Australia. Right. Tensions are escalating there. I mean, let's please hope that there's no eminent war or anything between China, but like, Hey, that's a concern. You can talk through that. And you can read plenty of articles from a geopolitical standpoint that talk about these heightened tensions with respect to China and the US. China's interest in overtaking Taiwan at some point in time. And those are variables that should go into some sort of economic model or stock pricing model, potentially. Meanwhile, we have all these supply chain issues, but at the same time, like you highlighted, retail sales are doing incredibly well. And the employment situation here in the US continues to get better.
Justin Dyer (09:26):
What's the Fed going to do? The Fed is going to potentially start to at least taper or slow down, is basically what that means. Slow down the purchase of assets that they have been doing since March effectively of last year. What does that do? Right. There are just so many forces. Which one's going to outweigh the other? And again, we're just scratching the surface there. That the model that you can try and build to reflect all this stuff, I mean, it's almost impossible to get it anywhere near a good outcome.
Brandon Averill (09:58):
Yeah. And I think that's an important point, right? Is that what we've acknowledged on this podcast for a long time, is that the markets do, they reflect all of this information, all of this available information, right. And if you're one person, even a team of 10, or 50, or 100, or 1,000, right? You got these big companies that think they've got collective wisdom with 1,000 people. It pales in comparison to the greater entire market, all market participants, right? It's the old jelly bean jar example where, Hey, if you go and you guess the number of jelly beans in the jar, right. And you go through even the more analytical people like you Justin, you come up, you're measuring the jar. You're trying to figure it all out. I just walk up and guess. We're both off, but together, we're probably closer.
Brandon Averill (10:48):
You start adding three, four, you add a million people into the guessing of that jar, we get pretty darn close. That's what the evidence shows. And so as information is developed, it just brings a better price to what our expectations could be. And I think your whole point here is let's say you did get lucky and you figured out, okay, the bond buying program's coming to an end. What does that mean? It probably means that the markets are going to decline. First, you have to guess that right. Are they going to decline because of that event or not. But then you actually have to nail the day, right? If you don't nail the day, we all know this, the potential peril of going through this whole market timing exercise, we know the stats, but to revisit them. If you would've invested $1,000 in US stocks in 1970, that 1,000 bucks would be worth more than $120,000 today.
Brandon Averill (11:46):
You just miss one day during that period and the period is like over 18,000 days. So you miss one day out of 18,000, now you've lost 10 grand. You miss five days, it costs you 40 grand. You miss 15 days, 75 grand, you miss 25 days, it's going to cost you more than $90,000. That's 0.1% of the time over that period. And we're trying to predict how today's events or the news of a bond buying program's going to decline. What if I miss the one day? Let's go to something recent, right, the COVID crash. I mean, you're crazy if you thought positivity was going to come out of the COVID crash. Right. But what we know is that eventually markets are going to recover, but trying to figure out when, that's crazy. So all those people that sold out because they were fearful and they're like, oh, I'll get back in when it turns around. I mean, their returns for the next decade are crushed if we look at the data.
Justin Dyer (12:45):
Yeah. It's incredibly damaging. And I want to go back to your point about not only being right, but getting the day right. And it's not even getting the day right. You have to be ahead of the market because the market, I mean, what you're seeing right now as the market goes negative for over the last two weeks is the market is taking in new information. What information it's weighing over other information. I mean, your guess is as good as mine to be totally honest. You'll see plenty of headlines that try and explain it. And really, they're just trying to get you to click on it. The market is such a diverse group of companies. A simple five word headline can in no way explain what's going on with all of those companies.
Justin Dyer (13:31):
But so going back to this idea of getting it right before the market does, that's how you would profit from this, not just saying, Hey, going back to the Fed, the Fed is going to taper. Okay. Let's just assume that's my position. I could be right about that. Does the market already price that in? Is that in line with what the market is expecting? So I have to be a contrarian or take the opposite position of what the market is pricing in on that given day and be right about it, if you will. Right. So it's no guarantee. Like let's just say again, I take the position that the bonds are going to taper or stop buying their bond, or the Fed's going to stop buying their bonds. And it doesn't happen. I'm wrong. Right. And I'm not going to profit from that, obviously.
Justin Dyer (14:23): So it's so complex. Not only is it just about being right, or assuming that a company's earnings is going to be X, but it has to be, are you assuming their earnings are going to be different from what the market is going to be or the market is currently assuming. Right. And it's just such a complicated and complex really question, I guess, to answer and you could get lucky or you could get it right one time, two times, whatever, but it's really important to take a step back and say, well, wait a second. Is this a repeatable process? Does this make sense to formulate an investment process around, investment plan around? And the data time and time again, basically it just says, no, it doesn't. You're likely to be lucky occasionally, but you're likely to be wrong more often than you're likely to be right.
Justin Dyer (15:23): And then further to that, and I'll stop here is that by kind of chasing your tail, making these knee jerk reactions, you introduce, call it friction into the portfolio. We talk a lot about, we want to be tax efficient, and that's essentially what I'm getting at here is if you were to make a trade in reaction, in anticipation of what's potentially coming down the pike and you do that often, because that's just how humans are wired, you're likely to just have a terribly inefficient tax strategy. You're going to incur gains. You're going to incur short-term capital gains in all likelihood. And you're paying ordinary income on that, right? I mean, you're giving away money by making decisions like that in the market, as opposed to thinking over decades, letting money compound over the longterm.
Brandon Averill (16:16):
I think that's a great point, Justin. I know this conversation, we get fired up and I think we might even make this sound like, oh, shoot this is scary, I don't want to participate in the market. But I think the good news, right, the good news of all of this is you actually can participate in the greatest wealth building tool that we all know, right.
Justin Dyer (16:37):
That's never been created.
Brandon Averill (16:38):
Ever been created. You get to participate in this great thing, right? The ingenuity of the world and the growth of economies and capital markets, you get to participate in all of that. So what we're talking about is more, you don't have to go through the rollercoaster ride. The example of, we've all been there, you're on the 405 freeway and you're like, shoot, I want to get there a little quicker. I'm going to switch to this lane, I'm going to switch to that lane. All you do is drive up your stress. Right. But you don't actually get there any faster, but the good news is, is like,
Justin Dyer (17:09):
Great analogy.
Brandon Averill (17:10):
You actually can just sit in your lane, turn on some good tunes and just chill out. Right. And you're going to have a positive experience. And I think when we go back to the simple truths, I heard a gentleman give a presentation the other day and he hit on these things. But I think when you start to simplify, understand what's going on, hey, I want to participate in the greatest wealth building tool ever created. But I also know that there's a lot of uncertainty in the market in the short term. So a good example, the S&P 500, we know that it's returned nine to 10% averaged over the last 90, but there's actually few years where it performed at that level. Right.
Brandon Averill (17:54):
And in fact, there's actually been 40 years where the returns have been greater than 20%, or has declined more than 20%. So, do you want to be on that lane changing rollercoaster ride? Or do you want to participate and know that, Hey, if I just accept that I'm not going to measure my success in hours, or days, or months, or even years, quite frankly, but rather in decades. Right. And I've built my plan to make sure that I don't have to worry about the hours, the days, the months, and the years. If I have a long-term plan, I can measure things in decades. I'm just going to have a much better ride. I'm going to have a much more successful outcome.
Brandon Averill (18:35):
And don't let the media, don't let the media do what it does best. We all know this, especially in today's times, is that the media is there to sell us stuff, right. Is there to manipulate us, keep us on their platform. Don't let them do that. Pull yourself away, evaluate, again, take a step back, start evaluating with longterm, and just remember the importance of the plan on your investments. Everything should be centered around your priorities. Identify those with your advisor and then allocate your money appropriately to that. And what that allows it, pulls all the stress out, right? Allows you to have that investment experience that you don't have the anxiety and the stress and all that comes with it.
Justin Dyer (19:17):
Yeah. And I mean, that's such an important point to kind of wrap up on, because really at the end of the day, what that means is simply risk management. Now, I think the term risk is misdefined or I guess, confused if you will, within the financial media and even within our own industry. Really what matters from a risk management standpoint to you, the end investor is the permanent impairment of your money or the inability for you to reach your priorities. So if you have a goal that is incredibly important in the next two years, 10 years, 20 years, whatever it is that needs to be secured in the best way possible. And then your risk is mitigated by doing that. And that's how we approach through a liability driven investment philosophy. It's really minimizing the risk to you reaching your goals and your priorities, right?
Justin Dyer (20:21):
And then we'll take risk where risk makes sense to take. And in the sense of what we're talking about here, risks can be, Hey, we're putting it in equity markets, we're putting it in the private markets and you're going to experience volatility. That's just what it is. But that volatility does not come into this really important area of your life, where conversations with your advisor happen and truly gives you that better experience, that better outcome. And at the end of the day, a more rewarding life, right? That's what we're here for.
Brandon Averill (20:54):
Absolutely, absolutely. So we went a little long today, but hope you stuck with us. Because I think the good stuff's at the end there. But as always head over to AWMinsights.com and download our 10 key principles to investing like a pro. We'd love you to subscribe, if you haven't already, to the podcast, send it to a friend, that'd be awesome. And until next time own your wealth, make an impact, and always be a pro.