Transcript:
Easan Arulanantham:
What would you What would your moves be if the market did deteriorate and got worse?
Tom Vaughan:
Yeah, that’s good question this came in earlier this week. And basically, you know, how do how do we get more defensive? If the market continues to do poorly, you know, what do we do? And how do we continue to do that. And so they have to understand what defensive means. First of all, for most clients, they already have a targeted mixture, 60% stocks, 40 bonds, 80 stocks, 20 bonds, or 20%, stock at Bond. So that’s important. So there’s already a defensive mixture of some type built in automatically from day one with each one of the accounts that can change over time, but that’s there. And so really, what we’re talking about is just the stock market portion here, because there’s for most of our clients, or average clients about 60%, stock and 40% bond. So for most of our clients that already have a defensive position in their portfolio with these bonds, which should hold up a lot better than the stock market, and possibly even go up, we’ll see I mean, this, this is a default on the bond market. So how does that affect that, again, this has not happened before.
So when you look at the stock market, there’s three different ways of getting defensive number one is you can move into more defensive stocks. And so these would be things that don’t drop as much usually. So for example, people still need food, they still need toilet paper. And so companies that produce these, what are called consumer staples, often do quite well and downturns in comparison to the market, they might not go up but they don’t go down as much. And utility, sometimes you’ll see as a safe haven, you know, because again, they have monopolies, people still need heat, and, you know, water and those types of things. So there are different pieces that you can move into that or defensive in that regard. And we actually did that to our portfolios. But over a month ago, back in, you know, August, middle of August, we got more and more defensive just because the market had gone so many days in a row without any really big downturn, it just seemed like that was somewhat inevitable wasn’t expecting this debt ceiling issue, although we didn’t know about it. And so that’s one piece so you could overperform the overall market there. If it does come down just by having you know, some more defensive pieces, the next thing you can do is essentially kind of moving out, you can move out to a money market, I tend to like something like an ultra short term bond fund makes more money than the money markets as far as that goes.
And you know, we can buy and sell these Exchange Traded Funds without any commissions. So that’s good, it’s easy to move in and out of them. So that’s the first would be possibly defensive stocks, like consumer staples, next would be, you know, getting out of the market, adding to your bond position, for example, and then hoping to go back if things get lower. The last thing that you can do is actually move into holdings that go the opposite direction in the market. So they have these inverse positions, like a pro shares has one ticker symbols SH it’s a, you know, an exchange traded fund an ETF that is designed to go exactly the opposite direction of the S&P 500. These aren’t great long term holdings. But they can help to solidify some of the, you know, losses that you might be having. And I tend to go down that spike. And the last thing I look at usually, and I didn’t mention it, because I’m probably not going to consider at this time, our long term treasuries. It’s what we did in the 2020 downturn, and that worked fantastic. But this particular downturn if it got that severe could be because they’ve, they’re defaulting on treasuries. And I have no idea how that Treasury markets going to react to that. So I probably stick to those first three categories. And again, I only move into those as things get more and more severe. We don’t do this very often. That’s for sure.
And I again, I wouldn’t normally, you know, do this. But we’ve had you know, we had a 35% downturn in about six weeks, but last year, had to get a little bit defensive there somehow. And then secondly, you know, was that, you know, that ceiling issue is, it’s a big one, it’s a different story, it’s it’s definitely a problem. And one of the problems you have to understand about the debt scene is we don’t really know what’s going to happen. So for example, in 2008, when everything started it really, some of the companies were defaulting and having trouble like Lehman Brothers, and so they didn’t bail Lehman Brothers out, it was 150 billion that they needed to bail him out. And what people didn’t realize there was all these other dominoes sitting next to Lehman that nobody really realized. And when they folded, you know, boom, boom, boom, all these dominoes are falling. So if they default on the debt, that’s a big issue. What are the dominoes, what are what’s sitting out there that’s waiting to fall based on that weakness that could happen. So that’s where you get more and more defensive, just to try to protect yourself.
One of the things about retirement in my opinion Is that, you know, you can’t really suffer a 14 year downturn. You can’t sit there, I’m a big buy and hold believer, but the depression, the stock market dropped at 6%. And it took 14 years to come back. And you can’t go through that as a retiree, believe me. So that’s where you want to be a little bit more cautious in these more extreme situations, the rest of the time, you should really just be buying hold with some small movements of some targeted indexes, then that seems to work pretty well. But, but this is one of those situations to watch out for it. And I’m not trying to scare people here, because I really don’t think it’s going to happen. I actually think you know, what we’ve already done should be enough. And then we’ll be able to come back in, I’m just hoping to be able to buy it a little lower point and buy some good quality things, buy some broad stock market pieces. And then once they resolve the debt ceiling, I would suspect that things could really jump, because everybody’s going to be trying to get back in at one time, because they’re being compared to a stock market index. And they don’t have everything in the stock market right now. So anyway, that that is what’s kind of, in my opinion, a strategy to take a look at for forgetting more defensive.
Easan Arulanantham:
Yeah, you know, just like a earthquake, emergency plan, you know, you have the emergency plan ready, and you just hope you never need to use it. But you don’t want to be panicking when there is the actual emergency.
Tom Vaughan:
Yeah, I think and I, you know, I think this is where somebody like me and our business comes in. This is the value that we add, we have a plan. We’ve been through it before. We did, I think fantastic. Last year in the downturn, I’m ready. I’ve got all kinds of different strategies. Unfortunately, these big downturns are becoming more common. And I don’t think this is going to be one but if it does, we are, you know, we do have a plan. And I actually look at this as opportunity. And that’s what helps me a lot mentally, I think there’s a chance for us to make money here. And so you know, I’m always looking for that chance. And that’s what we did last year. I mean, we bought Apple on the fifth of March, I think it’s up 143% in our taxable accounts. And so you know that those chances and things that we can take a look at, I will put one other piece out here, which I do think is important is if you have what I’m talking about mostly applies to accounts that aren’t taxable, like IRAs, or 401k, KS or Roth, IRAs, that type of stuff. Because one of the problems is like, for example, in our taxable accounts, right now, we have some positions that are up about 11%, you know, that type of thing.
But we have a whole lot of positions that are up 50 to 140%. You can’t sell those and get defensive, because what will happen if you sell them and she’ll end up with a big loss automatic because attacks, you could lose maybe 30% attacks between state and federal taxes, even on a long term capital gain. And so losing 30% of your gains, just to get more defensive doesn’t make any sense, you’re better off kind of a buy and hold there and maybe just draw a line in the sand, hey, once it gets to a certain amount of gain, I’m going to take it and just you know pay the tax. But we’re at 50 to 140 on so many holdings, you know that’s a good thing, right? If you have something at a loss, you could take that take the loss and bank it and be more conservative, you have things that small gains, yet could take that. But a lot of our taxable accounts have big gains. So those we want to kind of hang on to until things get really poor. So what I’m talking about right now, getting defensive has a lot more to do with what we can do with no tax inside of an IRA or inside of a Roth IRA or those types of things. So and that’s what we’re doing it that that that helps as far as that goes. And that’s a piece of the puzzle. It’s why you want to have lots of different types of accounts in my opinion going into your retirement.