Speaker 3
That's a great question. You know, it boils down to time horizon. And so people who have a short time horizon, you feel this a lot more than people who are investing for 30 plus years. the timing and order of market returns year over year and how it will impact a retirees portfolio. So, you know, the long term time horizon, basically, you can ride the wonderful ride of the S&P 500. But if you need money now and are withdrawing actively from your portfolio, that's detrimental. know math and money just don't work losses hurt a whole heck of a lot more than gains help it takes about a hundred percent return to recover from a 50 loss and so putting this in a very high level, not too nerdy format here. If you start with $1 million in 2000, all right, you average for 20 years about 8.2%. You will end with about 400,000, assuming a 5% withdrawal rate, very modest. But if you flip the years around and you take the returns from 2020 and front load that, that $1 million turns into $2.4 million. So a big, big change, even though you are averaging 8.2% the entire time. So timing and order is the biggest thing. And, you know, many financial planners out there in the industry will use straight line averages. And that's really not the best way to capture sequence of returns risk. The best way is really stress testing your portfolio to find how resilient it actually is. So once you figure that out, you can develop a plan. So increasing your cash reserves, maintaining a diversified portfolio, having a dynamic strategy are three very easy steps that I walk clients through almost every single meeting that are in this specific situation because it's real. It's scary. Going down 20% as soon as you hit your last paycheck and retire, that's not a good feeling. So that's how we address sequence of returns risk here.
Speaker 2
Yeah, you know, I would
Speaker 1
add that, you know, a big part of it is you mentioned the investors will project out that 8 percent annual return, but you're never going to get that 8 percent return every single year. Right. So the big thing that we're always focused on is we want to keep clients on their path. And they have these, you know, clients are humans, humans have emotions. So we're always battling the two emotions, FOMO, fear of missing out and solo, which is scared of losing out, right? I would say three months ago, we were feeling a lot of FOMO, right? Clients are, you know, pushing us to be more aggressive. I want to do this. I want to get more exposed. Why do we have anything other than U.S. stocks? But now they're starting to feel some solo. And I think that's what your viewers might be thinking about. So what we're always thinking is, you know, we talked about the sequence of returns. That's one of the big risks we're focused on as far as managing risk. The other big thing we're focused on is managing risk to keep clients on their path, because the single biggest mistake that a client can make is to, in a period of either FOMO or solo, change their plan, right? Because if they change their plan at the wrong time, that's how they damage their long-term financial success. So that's what we're very focused on, both on the planning side, from Todd's side of things, then also from the investing side. How do we get the portfolios to get them there? Yeah,
Speaker 2
I think you're right. And, you know, Todd and Ben, you talked about this concept of loss aversion. And, you know, statistically, Daniel Coleman said that human beings feel the loss psychologically of a loss twice as much as they feel about a 10 or 20% gain. So losses are obviously a big deal and human, we then run from away from risk. And one way our viewers may want to think about that is just doing dollar cost averaging. So you're not putting it all in at once. Like if you got a spring bonus from your company, you may decide to do dollar cost averaging. So you're putting in money and you're participating in the market, but you're not doing it all in one lump sum. But you're using dollar cost averaging and thinking about a long term mindset so that you don't have the emotional component over time, which can make you make better rational decisions. So something to think about. But Ben, I want to really ask you, there's signs of rotation occurring in the markets. There's some sectors that may be possibilities like energy, healthcare, financials. They're outperforming tech. Do you see opportunities today?
Speaker 1
Well, it's funny you ask that because probably, you know, at the end of the year, I was trying to explain to people why we own health care companies when there's going to be this great regulatory burden coming. cause the price of oil to go down. So really what we've seen so far this year is we have a lot of stocks that we own in the pharmaceutical sector that have done well, have had a good start to the year as investors have been shifting around. But actually where a lot of the ideas are starting to turn up, which will be interesting, is in the tech sector space. A lot of the things that people were really excited about, we've actually been going through a pretty long period of turbulence in the tech space. So starting to see ideas kick up also with a lot of these tariff headlines, seeing a lot of the industrials get churned up. So, you know, looking through ideas there, but also very happy with, you know, the energy exposure that we have, the health care exposure we have. It is it's been a very, very volatile market below the surface. I know we've had this recent 10 percent pullback. so now everyone kind of sees the volatility from the top basis. But below the surface, for the past year, we've seen a lot of rotation in and out of sectors, volatility with individual stocks, and that's really been churning around below the surface.
Speaker 2
the 10-year Treasury and the credit market. So the 10-year Treasury dropped 2.3 basis points. It closed Thursday as of March 27th at 4.36. You know, there's been convexity purchases that are believed to be mostly behind the drops today. These purchases help offset effects of mortgage refinancing to take advantage of lower rates. Now the U.S. market bowers are piling into European bond market ahead of April 2nd's tariff deadline. Ben, what are the credit markets telling us as investors? Well,
Speaker 1
what we try to do on the fixed income side is take a step back. I think the really interesting thing when we're seeing folks worried about the equities, what's going on, what are the economic risks, the real interesting thing is the 10-year, as you said, is still at 4.36%. It's still in the mid-fours, right? In last August, we had what we call the unemployment freakout when we saw the markets really sell off. We had a weak unemployment report. Everyone decided, oh, that month we must be in a recession. We saw the 10 year ultimately get down to about 3.8 percent. It got below 4 percent. Right. So for us, if you want a nice round number, 4 percent is an important threshold on that 10 year. Right now, the 10 year is not saying I'm worried about recession, which is interesting because in the stock market, there's all this volatility causing these concerns. And so for us, we look at that as one positive sign. And the second positive sign that we see in the credit markets is that despite this volatility, the S&P again pulling back 10 percent, high yield and investment grade bonds, they've had a little bit of a pullback, but high yield is maybe even 3% from its peak investment grade, maybe two, and they're about flat year to date, which is not far off with the ag is doing, the overall bond market. So it's interesting. We have all this action going on in the stock market, but the bond market is behaving as if things are relatively normal, at least so far. So that's really what we're paying attention to because if we see the high yield markets start to come apart or we see that 10-year really drop and start getting down towards four or going below four, that's a sign that something really could be shifting. Maybe we do have to think about what the economic outlook is, how that might be changing. Yeah,
Speaker 2
so there's a lot of cry for recession in the equity markets, but not a lot of indicators in the credit market. So it's good to have a translator like you as an advisor to help clients understand what those mile markers mean for us. So Todd, any comments on that? Yeah.
Speaker 3
When setting up a portfolio for our clients, especially on the bond side, we like to mix and match and kind of balance our risks. So we just talked about credit risk, all right? We didn't talk about duration risk, but obviously duration risk is out there and Ben can definitely say a little bit more on that. But over and above the traditional bond ladder, we like to mix in a little bit of credit risk and a little bit of duration risk to a portfolio so that if one outperforms, the other typically might lag, but at least you can point to something in a portfolio that is holding up based off of changing market conditions. And so, you know, it's really key to find that balance in the bond world and, you know, point to one versus the other based off of changing market conditions. That's
Speaker 2
right. That's exactly right. I love the way that you can explain that to clients and they can understand the impact to their portfolio. So let's talk about our next really big thought here, and that's gold versus the S&P. So on the bright side right now, gold and other metal investors are seeing some big returns. And I know on Wealthion, we have a lot of viewers, a lot of investors who are really thinking about precious metals right now. So all sectors of gold are outperforming the S&P. Bullion, you know, that's really a term. It's direct gold ownership. Bullion has rallied 15 percent this year and hit a record high last week. And the ETFs for bullion are also up. The ratio of the S&P 500 index in terms of gold has dropped to its lowest levels since the pandemic, which highlights a preference for safe haven assets among investors. And a lot of investors see gold as that safe haven. But in addition, silver, platinum and palladium are all advancing. And copper also jumped after the U.S. tariffs on copper imports could be coming within just several weeks, months earlier than the deadline that was originally indicated. So we have a lot of interest in gold and precious metals. Todd, gold has long been seen as a safe haven. Are you encouraging clients to have more of this in this portfolio? And if so, how much?
