Transcript:
Easan Arulanantham:
So polls are showing and most Americans are very pessimistic about their personal finances. Is there any strategies to kind of, I guess, sleep better at night?
Tom Vaughan:
Yeah. Right. I mean, this is one of those environments where it’s just sort of, you know, we get this hope that we had this big run at the end of March, okay, when I become and it comes back down. And we just had, we had a 9% run just a few weeks ago, you know, and then we got sideways, we’re bouncing off the top, there’s some hope there. And then the hope gets dashed, at least, you know, for now, because the inflation never comes out higher. And so how do you sleep better, has a lot to do with just being able to, you know, kind of understand, you know, your overall scenario, but you’re in good company. And let me let me share, you know, some, some info here. This is that consumer sentiment survey. So if you’re nervous about your investments, and having trouble sleeping, there’s a lot of people on the spot. So what this came out and tried to describe this is going back to the 1950s, we just this week, just today, this was just released today, the consumer sentiment surveys, you tell them what it’s what they ask, and kind of what their what they’re looking at there. So the consumer, it’s basically a questionnaire where they ask people 40 percent on kind of like a present scenario where you feel your are now and then what’s going to happen six months. And so other 60% is about the future. And so people aren’t very happy, or, you know, bright on what’s going to happen in the next six months, they feel worried kind of going into a recession. Yeah. And so this surveys that 50.2 All right, that’s the lowest it’s ever been.
And so, but if you look real closely, it’s a little hard to see this, but if you look, the time, the one that was almost as low is right there in 1980. And if you, if you listen to the headlines, the inflation number that we keep beating like today, was the highest inflation year over year since 1980. So it’s the same environment where people feel like, okay, costs are going up and up. And every time I go to the gas station, you know, I get nauseous, and all these things that are happening. And, you know, my paycheck maybe isn’t keeping up, my portfolio certainly isn’t keeping up, you know, that kind of thing. And so, sentiment is out there is basically, you know, negative right. Now, one of the things I think very fascinating to me is people are answering that poll in a negative way, and then going out and spend money like crazy, because consumer spending is skyrocketing as part of the problem, which is ironic is that, you know, too many people are going out and spending money on all these different things. And that’s creating this inflation, right scenario. And not to stop you from spending money. But that’s that that’s what’s happening. So again, there is a diverse dichotomy here between what people are answering in the survey, and what what they’re actually doing as far as that goes. So I think, you know, it’s definitely an issue. It’s something to think about. And the way that I always recommend you know, how you deal with this.
And how you get back to a point where you can sleep better, is you just need to make sure that your overall situation is as tight as it can be. So you have a portfolio that meets your risk tolerance. If you’re really nervous about your portfolio right now, and it’s going down more than you think it should, that’s not a good sign, because this is only about an 18% drop. And this is a every three years, we practically get a drop like this. So you might be in a portfolio is too aggressive. And maybe you need to kind of reassess where you’re at, and get back to a more, you know, conservative portfolio. So that you just, that’s number one, you have to have a portfolio that fits I mean, we use a company called Riskalyze. And Riskalyze, sends out an email to our clients every three months, and they can go in there, they answer a couple of questions. And then it shows them for their portfolio, how much that portfolio would have dropped in 2008, how long it would have taken to come back. And I really talked to the clients about you know, you have to be able to accept that. If you can’t accept that, first of all, you won’t get the bigger returns when the markets go up. But secondly, you know, you’ll end up kind of not sleeping well. And maybe even, you know, cashing out at a really bad time. So having the right portfolio I think is super critical to sleeping better. So, you know, you should be analyzing that right now. This is a good time to take a look at it to make sure that you’ve got what you want in that portfolio. And then by by level of risk is really mainly stocks versus bonds. And then what type of stock would be probably the next level right because you can have a I’ve seen portfolios with 40% stocks that are more aggressive than a 70% stock overall allocation, you know, just because of what’s in there, just a low number of holdings are really high volatile pieces. So those are the two pieces, how much stock? And what types of stock Do you have? And how much do those traditionally move?
Easan Arulanantham:
Yeah. And I also think having a plan, you know, with a financial plan, we can check, you know, the Monte Carlo simulation, and you can see, and sometimes we test for the great recession. So we test, you know, what would happen to your plan if we happen again. And so that’s a really good way. And so if your plan is still stable, with the Oh, a crash, you can sleep a lot better knowing that even though we’re going to downturn, I’m still have a good probability of being successful.
Tom Vaughan:
Yeah, this is how I would answer it, it’s how I would feel better. You know, at least I want to know this, if the number is not good, I wouldn’t feel better, but at least I know, and I could then start to make some adjustments to my portfolio to my lifestyle, whatever I have to do to make this work. But in this MonteCarlo simulation, in essence, right, we can run a basic Monte Carlo simulation, where we just say, Okay, push the button computer runs through your lifestyle, basically, 1000 times. And so we have everything in there, we have your assets in there, we have all of your incomes that are coming in, and we have all the expenses that you want to pull out of your, you know, to support your lifestyle, taxes, all of it. And so we run basic Monte Carlo simulation, says, Hey, here’s the here’s the chance of success. But we can also then go in and do a stress test, where we do two things. Number one, look at what would happen if we had another great recession, as he said, and number two, what happens if inflation stays high for the rest of your life? And what’s the probability of success there?
So, you know, if we go in and stress test, and we, you know, push the button, and that client comes out at 96%, they can sleep better, right? And so I think that’s part of it is knowing, we all can see, I’ve said this a million times, we can all see our statements, we all know what’s happening, we can see the market, we can nowadays we can go in and check it, you know, really by the minute and see what’s happening. And but what’s really hard to tell us what that really means long term for the rest of your life. What’s that mean? And how do you how do you figure that out? To me, it’s having this plan. And we have, you know, this setup, so it’s basically live, all the assets are feeding in, you know, on at least a daily basis. And then we just look at it, and we can push that button and just to get that MonteCarlo simulation number and find out. So honestly, if that came out in the purple, which is 75% or less, I probably wouldn’t sleep better, but I’d have some new plan to try to get that backup, right. But a lot of times people just see the value of their statements drop, or their accounts drop online. And they’re just worried about that. And they’re still sitting and let’s say maybe at 96% That should help you not worry as much when you’re still at a really high probability of success, even under stress testing scenarios, like inflation and a high drop of the stock market.
Easan Arulanantham:
And the nice thing about a financial plan is to it’s an early warning system, you know, you if your job down to like 50%, you still have time to adjust. Yeah, it’s not gonna be like I’ve instantly run out of money. Yeah. And so with these kind of early warning systems, we can make adjustments to your plan, maybe we cut back on spending, maybe we kind of change how the portfolio is structured, so just have a better chance of success.
Tom Vaughan:
Yeah. Having a long term outlook, being able to know where you actually are being able to know you know, what impact this downturn actually has on your overall success is what you should be thinking about, instead of just looking at the account values and the fluctuation that’s happening there, as far as that goes, so it’s good stuff.