Transcript:
Easan Arulanantham:
Sir, next question is not really a question. But a concept that we have to go over a lot in our client meetings is why trying to lose less is important.
Tom Vaughan:
Yeah, it’s sort of a situation where, you know, as a client, you don’t wanna lose anything. I mean, in an ideal world, you just make 10% Every year, and never have a loss. And there were periods of time, you could do that at the banks, right? When interest rates were really high, and you could buy a 10 year CD. But obviously, that’s not true today, even with these higher interest rates, you can’t do that. And so when you’re in the stock market, you’re going up and down to get that 10%, or whatever you might be getting. And so there’s some some, you know, risk of loss there. And so one of the points that I try to make to people is that, you know, anything that we can do to lose a little bit less than the market, and still be pretty prepared for the upturn, because there’s two parts, there’s lose last and there’s recover faster, those are both things that I focus on. And, you know, you try to make some adjustments to portfolio to lose less, well, you’re still keeping your eye on the on the recovery, the possible recovery. So for example, I’ll really focus on you know, what’s happening in these updates, because those are the things I think might go up when things go up again, and really start to recover.
And so, but there is some math behind this, it’s important to understand, so let me kind of share this little chart here that we made. So if you have $100,000 investment, and you have different levels of downturn, so let’s say you lose 20%, and I have 80,000, right. So I have 80,000, I want to get back to 100, I have to make 20 $20,000, right, which comes out to recovery return of 25%. So it’s just simple math. But it makes a difference. So if you look at now somebody else loses 33%. Right. So now they have $66,700, give or take, they have to make 50%, to get back to 100,000, somebody who loses a 50% now has to make 100% rate of return to get back to where they were at 100,000. So the less we lose, because there’s kind of like this almost compounding factor there, the Recover return is going to be you know, much more manageable as far as that goes. So you have to be careful, if you’re trying to really, you know, again, you have to bridge two pieces here, how much you come down and how fast you recover. Because if you get out all of a sudden in a panic, and the market bounces back up, you just miss the recovery turn, and then you get back in and it’s slowly going up. And it might take you a heck of a lot longer.
So, you know, there are periods of time, I think where you probably want to get defensive. As far as that goes. But they’re pretty infrequent, we’ve only had what, four massive downturn since the 70s, the 73 downturn in the 2000. downturn, the 2008 downturn in the 2020 downturn, right, those are the ones who need to go back and get out halfway down, you’d be pretty darn happy. Even if you didn’t get back in at a perfect time. But most of the other times you would have been better off just hanging in there and using other strategies. And that’s my Outlook, I’m really looking at the big downturns. And that’s what I watch for. I try to use other strategies like rebalancing asset allocation, you know, being a couple of target pieces that I tried to pick to try to do better in certain situations, right. But this downturn pieces are really important and very important to try to lose less on the downside, even if it’s just a little as long as your position for that upside recovery, because that’s where you get your money back.
You know, the market has gone up over time, no doubt. I mean, you pick all those big downturns to that 73 markets way higher. 2000 huge downturn, you know, hit us here in Silicon Valley, I still wish I would have bought at the top because I’d still have money I wish I’d have bought at the top in 2008. Because I still would have made money if at about the top and 220 gets higher now. Right? So the market comes back, at least so far. And so and that’s that’s the key issue is just kind of have that overall outlook and understand kind of what’s happening in the long term too. But generally speaking, losing less is a really, really good idea. And ultimately, you know, up to those big downturns, you want to just try to structure the portfolio for something that you think is going to recover really well. That’s what I do, but might fall a little bit less. I feel like our current portfolio has done a really good job with that so far this year. So you know, that’s what we’re trying to accomplish there. So, yeah, it’s a good question. It’s very, very interesting area