Today I’m talking about investing.
Specifically, I’m joined by data scientist and author, Nick Maggiulli. We discuss his new book, Just Keep Buying, the recent inflation report, and investing during a market crash.
Key Takeways
- How to invest in high inflationary environments
- Why you shouldn’t “buy the dip”
- A unique formula for investing during market drawdowns
If you’re ready to dive into data and get answers to some of the biggest investing questions, this episode is for you.
How to Listen to Today’s Episode
🎤 Click to Listen via Your Favorite Podcast App
Episode Links & Resources:
- Need a One-Time Retirement + Tax Analysis?
- Nick Maggiulli
- Just Keep Buying [New Book!]
- Of Dollars and Data [Blog]
- Will High Inflation Hurt Stock Returns? [CNBC Op-ed]
- Stay Wealthy Inflation Episodes in 2022:
- Inflation Part 1 (2/9/22)
- Inflation Part 2 (2/22/22)
- Why I Was Wrong About Inflation (3/15/22)
- March 2022 CPI Update: Has Inflation Peaked? (4/14/22)
Episode Transcript
Why You Shouldn't "Buy the Dip" With Nick Maggiulli
Taylor Schulte: Hey everyone. Really quick before we start the show friend and popular finance author Nick Maggiulli has a new investing book out called Just Keep Buying to support Nick and continue to put good information in the hands of our listeners here. I personally purchased a box of them to give away.
To claim your free copy of Nick's book. All you have to do is write an honest written review of this show in the Apple Podcast app. Take a screenshot of your written review and email it to me at podcast@youstaywealthy.com.
If you don't have an Apple device, go buy one, write a review and then return it. I'm kidding, kind of. But really, if you don't have an Apple device, I'll leave it up to you to get creative and just support my goal of helping other retirement savers like you find this show and hopefully the other podcast apps out there will get their act together one of these days and allow for written reviews.
Until then, thank you for your continued support. Let's dive into today's show.
Welcome to the Stay Wealthy podcast. I'm your host, Taylor Schulte, and today we are talking about investing specifically. I'm joined by data scientist and author Nick Maggiulli, and we are talking about three big things.
Number one, how to invest in high inflationary environments. Number two, why you shouldn't wait and buy the dip. And number three, an actionable formula that you can use to invest during market drawdowns.
So if you're ready to dive into the data today and get answers to some of the biggest investing questions, this episode is for you. For all the links and resources mentioned today, just head over to youstaywealthy.com/150.
I want to start with a current event. Inflation has been on everybody's minds and March CPI data just came out and reported a 8.5% year-over-year increase. I don't think anybody's surprised by that. One estimate I came across said that households are spending an additional $327 per month due to the recent spike in inflation.
Before we talk about maybe how inflation might impact your investments or how to think about investing in higher inflationary environments, I would just love for you to share your thoughts on just the recent inflation news. What do you make of the recent inflation reports and inflation in general? Is it concerning to you? Are the news headlines overblown? I'd just like to start there.
Nick Maggiulli: Yeah, so I'm not an expert on macroeconomics, so I'm not going to try and predict whether always inflation going to continue. Is it going to go up more? I don't know. Obviously a lot of the stuff that's happened recently has been very structural. There's a lot of supply chain issues.
That's a lot of the things people are talking about and it's concerning because most of my life I've lived in 82% inflation environment, two to 3% basically all of my life. And now we're finally seeing real inflation rear its head. I think I was a little surprised. I thought when I heard the White House say inflation expectations will be extremely elevated, I thought we were seeing 10%. I think that would've shocked people if it had went from whatever, 7.5 or whatever the last print was to 10. I think that would've shocked a lot of people.
So for me, inflation's obviously scary price keep going up and you're like, what? My Chipotle bowl used to be $12, now it's $16, what's going on? And I've seen that type of stuff happen somehow. The New York pizza slice is still a dollar though. So I live in New York City and that has not changed. No one's talking about that.
That price has not moved in literally probably 20 years and either the quality's getting worse or I don't know, somehow they're making up for it. So it's an inflation proof business somehow. But yeah, I think in general I understand why it's scary. Even for me it's like, well, price keep going up. Is my income going to keep up with this?
All the other things I'm doing going to match this over time. And that's something that's going to be very concerning. If you don't have income, it's like you're just living off your investments and unless your investments are going up to match inflation, it's even scarier because now yields are generally lower than they've ever been.
Retirees rely on income yet at the same time prices are going up. They can't go out and just like, oh, I'm just, I'm worry. I'm going to get that through my work. My income's going to rise with inflation if prices go up, no big deal. That's how most younger people can do that, but I think that's why it's a little bit scarier now than it's been previously.
Taylor Schulte: So with that and thinking about investing and thinking about making sure your money keeps up with inflation, especially in retirement when you're not in the working world, how do you think about investments and how do you use data to support some of your approach to investing during these high inflationary environments?
You wrote this recent op-ed for CNBC, one of the titles was High Inflation Won't Really Hurt Stocks in the Long Run. So shifting to bonds, shifting to cash, putting all your money under the mattress is obviously not prudent for somebody who needs their money to keep up with inflation. So in your mind, what should investors do? How should investors be thinking given the current environment?
Nick Maggiulli: So if you actually look at the data going back to the seventies, I think the assets that did the best are relatively the best. So I'm going to preface that, I'll get to that in a second. Were stocks, equities of some sort, whether that's US international and then REITs, those are the ones that did the best.
People say gold's an inflation hedge At some periods it has been. At other periods it hasn't been. I think over the long run, I don't think it is. I mean anymore. So really that's where most of that inflation hedge comes from. I think bonds don't really do as well.
And when I was writing that, I was basically saying, okay, in the short run it's not good because stock returns usually do pretty poorly relative to their average during periods of high inflation. So for example, when I think the number was like when inflation exceeds 7% over the next year, US stocks only return 7.3% compared to 10.3% when inflation is below 7%.
So when you're in a lower inflation environment or maybe not as extreme of an inflationary environment, stock returns are higher. Just from that alone, it's like, oh gosh. Well, if I know stock returns aren't going to be as good as they're normally going to be, shouldn't I go into bonds? I just buy more US treasuries?
Well, the issue is when inflation exceeds 7%, the real return on five-year treasuries is negative. It was negative 2.6% over the next year. So you're like, oh, I'm going to move treasuries, that's my solution, but bonds are probably going to get hit worse than stocks during this inflation run.
So that's where you have to really think about if you're trying to make tactical moves. And I think for a lot of people you can't make tactical moves and there's a lot of retirees who are already probably heavier in equities because bonds aren't paying anything.
And so to even be to go back, you're not only going to move more into bonds, you're going to probably lose more doing that. So I mean really that's why I say my result of looking at this data is there's not much you can do. You just got to kind of wait it out and hope that stocks still provide some return over the next period of time.
Now, of course, in the short run, in the short run, that's not great because member stocks are underperformed relative to the short run during lower inflationary periods, but over longer periods of time.
So for example, over a two year period, if you just look at periods of high inflation, so over 7% versus below 7%, the median return over all those two rolling two year periods is nearly identical. It's like 18% over a two year period that's inflation adjusted.
So when you look at it that way, you're like, wow, actually that's so over a one year period, it's going to probably not be great, but over a longer period, the inflationary effects are muted in some way.
So that's what the data shows. Historically, the medians are similar. Of course, if we end up in one of these weird scenarios where we're in an edge case that there's nothing you can do about the median, you have to live with whatever the universe gives you, but it's a little comforting to think, Hey, yes, these things happen, but it's usually just a short-term phenomenon, and over time these things will work themselves out.
Taylor Schulte: Yeah, I'm sure that's comforting for some people. When I use the word long-term, I'm talking 10, 20, 30 years. When you're referencing the data here, talking long-term, you're just saying, Hey, let's just get out from looking at the 12 month data and let's just look at 24 month data, and those numbers start to pair up nicely.
There's not really much of a difference between those high inflationary environments and low inflationary environments. Do you know off the top of your head how far that data goes back that you were testing there?
Nick Maggiulli: So I think, oh, that was going back to 1926, I believe. Yeah, because I don't think I'm going to say the data source, but I have a, actually no, I can probably say it. So we work with DFAA little bit. It's not a plug for them, but I'm saying we use their data, so they have a CPI data and they also have us stock data, so I can just easily, and then treasury, five year treasury data.
So that's what I used just adjusted. I said, so every two year period from 1926 to the present, you adjust for inflation, and then you just say, okay, what happens when inflation's high versus low and then compare it? Now obviously there's a lot more low inflation periods, so it is skewed. Sample size is smaller, but the data is what it is.
Taylor Schulte: So in case anybody missed that, I'll just read from your op-ed, it says the median inflation adjusted return of US stocks over the two years following periods of high inflation to high inflation, over 7% was nearly identical to the two year return following periods of lower inflation.
You referenced 18.5% versus 18.7% respectively. And you concluded by saying this suggests that investors with a slightly longer time horizon don't need to worry about inflation's impact on their portfolio.
And again, when I talk about long-term, I'm saying 30 years, and even those who are retired today, we're looking at a 30 year time period that they're going to be investing. So two years, 30 years, these are certainly longer term time periods than what's happening tomorrow or next month.
Nick Maggiulli: And I think the one thing you can do as a retiree is you can think about flexibility in terms of your spending and things like that. Now, obviously you can't delay things too much if you're like, oh, I want to go on a big vacation this year, but oh inflation, maybe things will calm down and the market will roar up so I don't have more principle I could sell down. I can do it next year.
You can think about that, but then there's health concerns. You don't know how your health's going to be in the future. So there's a lot of trade-offs you have to think about, and it's not easy, but if there's any flexibility you have that can be helpful in certain times or like, Hey, you know what things cost, I went up more than I expected.
Maybe I'll do some part-time work for a little bit just because I enjoy it. And also to offset these costs. There's ways you can do it to think that, oh, there's nothing I can do. I'm hopeless because inflation, I think that's not true. There's always some flexibility. There's always something you can do to try and offset this at some point.
Taylor Schulte: So I have to ask, and I know you wrote about this in a prior inflation piece, but cryptocurrency often comes up in the conversation to hedge against inflation. What are your thoughts on buying crypto or adding crypto to your portfolio as a hedge against inflation?
Nick Maggiulli: Well, I mean, isn't crypto down like 50% from its high and inflation's the highest value. If you look at the data, just correlation between S&P 500 returns and CPI, and let's just say Bitcoin, that's the most popular one and CPI, and you'll find that the S&P 500 is more correlated, the returns are more correlated with CPI changes than Bitcoin. And that's been true. It is true a couple months ago, and I know it's more true now, Bitcoin has not gone up as inflation has gone up.
So I know the correlation's getting worse. So I don't believe that. I think it's not true. I think bitcoin is a risk asset and for the foreseeable future it will be a risk asset. Maybe one day it will be a currency, but as of right now, I see it as a risk asset. It is not a stable coin.
It is not something that is where the value is a little bit more stable. I mean even you could even argue the US dollar is not as stable if 8% in a year. I mean it's not 2% a year, no big deal, but 8% that's a little bit more sizable, right? So even the stability of the measuring stick, the universal measuring stick of the dollar is not as stable as it once was.
So I'm just a little skeptical of the whole crypto is a inflation hedge thing. Everyone's saying that, but now that we have actual inflation, Bitcoin should just be going up and it dropped. Now it's at, I don’t know, it's at 40 or something by the time this comes out, who knows what it's going to be at, but it's at 40,000 right now, and I remember it peaked at 69 and it just dropped multiple times back up and down around those prices. So I don't see the inflation hedge argument really working out
Taylor Schulte: Well, moving on from crypto and Bitcoin and inflation here, I want to get into dollar cost averaging versus lump sum investing and specifically the stock market has been screaming upwards for the better part of the last 12 years, let's call it.
And one comment that you and I often hear from investors who have cash to invest, maybe they've had a liquidity event or they've been saving and they've got cash on the sidelines, one comment we often hear is that they're going to wait for a dip in the market to put that money to work.
I've touched on the past on this podcast, but you've got a great chapter in your new book, just keep buying. That takes a deep dive into the data around this and I'd love for you to talk through just some of the key reasons why investors probably shouldn't wait to buy the dip.
Nick Maggiulli: Okay, so I want to clarify something just really quick because technically I think you just brought up two different problems and I'll explain. And the issue I believe is in definitions, and I think the issue is that the term dollar cost averaging actually has two definitions, which mean different things like in the investment community.
So the original term dollar cost averaging was, I think it was come up with by Benjamin Graham, and he said it as like, imagine just buying over time. You're just dollar cost averaging to the market. So you imagine you get paid every two weeks and you put your money in just like you would in your 401k or something, right? You're buying over time.
Now that is the first definition and that's the definition I use. The second definition when you're saying, oh, dollar cost averaging versus lump sum, that's a different definition because what that is saying is imagine you have a bunch of money right now.
Let's say you sold a business or something, you have a hundred thousand dollars and you want to put it into the market. You can either put it in an all now lump sum or you can slowly what I call averaging in the book and just keep buying. I say I call this averaging in. So you average into the market.
The problem is people call that dollar cost averaging too. So you can see that there's a difference here in these two terms because one of them is just talking about a general behavior you're buying every two weeks, but what you're really doing is you're taking a lump sum payment and you're buying it immediately.
It's not like in your 401k, you take that payment and you say, okay, I'm going to take this payment and spread it over time. No, as soon as you get paid, you invest immediately. That's a lump sum, that's a lump sum type of investment even though it's a small lump sum, it's a lump sum. It's really about the timing.
Everything's about are you buying now or are you waiting to buy? I think that's the framework. I want to think about this. I don't like using the term dollar cost avenue versus lump sum because I think it confuses people because the dollar cost averaging I know is just buying over time, which I think is a great strategy.
So just to keep, everything's about timing, to just get back to the core fundamental issue is should you buy now or should you wait to buy at some future point? And in this case, you're saying should you wait to buy the dip? And the issue with that, generally the theoretical problem is most markets, or at least let's just use US stocks for now, but this is true even across international markets.
I show this in the book, this is true even in Bitcoin and gold and all these other assets that aren't necessarily income producing assets. But with US stocks, the markets generally goes up into the right, it goes up over time. Of course, there are periods where it doesn't, there's a 10 year periods, there's five year periods where it's not up from where it was five years prior. This happens.
But if it's going up into the right on average, then anytime you wait to buy the dip, by the time that dip comes, that price you buy at is higher than where you could have bought originally. And so one of the examples I like to use is on a total return basis, I came up with this idea in early 2017, this just keep buying idea. And people were like, oh, markets are too overvalued. I can't buy right now.
I was like, okay, let's say you had waited like I'm going to wait until there's a dip and you wait until there's a big dip too. So you wait three years from 2017 to 2020, March, 2020 to be exact, and you wait until the exact bottom, March 23rd, 2020. So not only did you wait to buy the dip, but you bought it on the lowest day, you just perfectly timed it.
Even if you had done that on a total return basis, you would've bought it prices 7% higher than you could have bought at the beginning of 2017. And so that's kind of shocking. Remember, I'm giving the dip buyer this insane information. You literally know the bottom and I'm telling you the bottom, no one's going to have that while the market's crashing. You're going to say, oh, I think I'm going to get a deal.
But then you're going to be like, oh, maybe I could wait and get a better deal. And so even someone, I bet there were people on March 23rd, 2020 when it was the actual bottom that said, you know what? I'm going to wait until it's down 40%, then I'm going to buy. But guess what? Six months later, it was at a new all time high.
So that's kind of the punchline. And so that's why you shouldn't wait to buy the dip because dips are rare and big dips the ones that are actually the most valuable to buy, they're super rare, and so they don't happen that often.
So while you're waiting, the most likely conclusion is you're going to wait in cash and the market's going to rise up and leave you behind and just leave you in the dust basically. And that's the most likely outcome most of the time, most of history. I cover the data in there. It's very obvious. This is true in US stocks. It's true in other equity markets too.
And the only time buy the dip works is when there's a big dip coming and you can time it perfectly and no one knows that. Could anyone have predicted March, 2020? No. And anyone who says so, yeah, I knew. No, no one knew that. Maybe you could have known it by January, February as you're studying the pandemic data or the data that was coming out, you could have been like, oh my gosh, it's going to be worse than we think.
Those people might've been able to do it. But in September, 2019, could someone predicted that? No, absolutely no way. The virus didn't exist yet. So that's kind of my counter to people trying to buy the dip because it's not a productive strategy.
Taylor Schulte: Yeah. One of the things I always like to bring back to the surface, I had mentioned that the market's been screaming upwards for the better part of the last 12 years, but it hasn't been a straight line up. There's been a lot that's happened in those 12 years ups and downs in the market.
The most recent, obviously the Covid crash in March of 2020, but there was dozens of events prior to that where the market was down. So it wasn't just a straight line up where it's like, gosh, the market's done nothing but gone up for 12 years, and I'm really spooked by valuations. No, we've experienced a lot in the markets over that 12 year time period.
Nick Maggiulli: Yeah, I agree. And I think the whole thing about valuations, yeah, valuations are high, but yields are low. I mean, don't get me wrong, yields have been going up recently, but my hot take is that I'm never going to see the 10 year above 5% the rest of my life. I think yields are dead forever.
And that's my take. I could be wrong, and maybe I'll be wrong and I'll eat these words later, but 10 years is really half that right now or something like that. But I don't think it ever gets back to 5%. I think that world is done. I mean with everything, there's negative yields almost everywhere.
There's just no return on that anymore. Given that if you believe that, then you're like, okay, well, yields are dead. So given yields are dead, stock prices kind of have to rise.
Taylor Schulte: Well, I know you're a data guy and you do a lot of research. What led you to make that prediction? And I know it's a prediction, we don't know the future, but of course, what's led you to feel that way?
Nick Maggiulli: I mean, there was this chart I saw which shows interest rates going back to the 1600s or something and the average rate of interest charged across all these different things. And of course this data is not perfect. I mean, they're trying to get data across hundreds of years and put it together and come up with a story. And there's been basically a global decline in interest rates over the average interest rate over time.
And I think the story here, and here's my take on it, and I don't think it's completely right, but I think there's some piece of this is accurate, is we've de-risked a lot of the world. Now what do I mean by that? Of course, there are exceptions to this, but think about it, in 1800, what one third of children died or half of children died before age five? I don't know what it's, it's a high number.
Childhood mortality was large. Making it to age five was almost a miracle. I think it was like half of children died until the modern era. And now that's not necessarily true anymore. This is even true across the world, even in Africa or other developing areas. These places are having their children survive a lot longer.
And not only that, but people are living a lot longer too. So old people as a class of people didn't exist 300 years ago. I mean, there were some old people, but it was very rare. I think if you look in the UK, I think in 1850, only one in four people made it to age 70 or something like that. It was some low number. Now it's like 90% of people make it to age 70. So old people are invented basically as a result of, I mean, as a class, not just individual.
I mean literally they're a cohort now because of medical technology, a bunch of stuff that's happened. And so think what that does for think about how you discount the future. Imagine if you're 30 and you're going to live to 90 versus if you're 30, you're going to live to 60, you're going to change.
If the future's promised more, promised the interest rate should go down. What does an interest rate think about? It's a measure of risk. So if you think about, oh, I'm going to be dead in two years, I'm going to charge you more to borrow my money, but oh, I'm going to be dead in 30 years, I'm going to charge you a little bit less. The more the future is promised, the less you're going to charge.
So I think this is a de-risk ification. And so as risk goes lower, then rates should go lower. I mean, the yields you're going to earn. So generally across the planet, there's not people in mass starvation, things like that. Things like that are kind of going away. People are living better lives.
Of course there are exceptions. There's stuff going on in China right now, but that's not done by the market. That's done by a regime. And I don't want to get into all that right now, but I'm just saying generally these types of things aren't happening. I think most people's lives, I think across the board are getting better.
There are certain sectors that are not, there's certain places and certain people are not doing as well as they were in prior years, but the bulk of humanity I think is better now than it was 30, 40 years ago. And I think that's why rates are going lower. So I don't think it's the perfect answer, but I think that's a part of the answer.
Taylor Schulte: Yeah, no, I really appreciate you sharing that with us and expanding. So back to buying the dip here. Let's all agree that waiting to buy the dip is likely not a prudent investment decision. It'd be really challenging to do and have success with. We will go through another recession.
We will see another 30 to 50% drop in the stock market, and when do, when the world feels like it's ending, it's not always just that simple to just hit the buy button like the textbooks tell us to.
So talk to us about your approach to buying during these market crashes, right? Again, we're not trying to time it, but we're in this catastrophic event here, and maybe we do have money to put to work or we're actively investing on a monthly time period here. Talk to us about your approach to investing during these market crashes.
Nick Maggiulli: So I'm going to try and say this as well as I can, but I think in my book, just keep buying. Chapter 17 is my favorite chapter, and it discusses this how to buy during a crisis, and so it's going to do a much better job than I'm about to do, but I'm going to try and explain it.
And basically, so remember, there's a difference between waiting to buy the dip and expectation of a dip and conditional, oh, you're in a dip once. You're in a dip, if you happen to have cash, because let's say you close on a business hypothetical, you sell your business at the end of let's say February, 2020, just by chance it closed, you get all that cash in, market's collapsing, everything.
This dip happens. It's like now March, 2020, you realize there's a dip then yes, conditional and you being in a dip with cash, you should buy the dip, but you shouldn't hold cash in expectation of a dip.
That's the difference right here. But let's say you're in the dip, how do you reframe it? And I came up with the simple, I mean, this is all just simple mathematics in the sense of every percentage decline requires a larger percentage gain to get back to even. So let's just do some quick math. If you're at a hundred, let's say you have a stock that's a hundred dollars and it drops to 50, that's a 50% decline.
But for that 50 to go back to recover back to a hundred, you need a hundred percent gain. 50 needs to double. It needs to go up a hundred percent to get back to a hundred. So that's how you can just from that, you're like, oh, there's a bigger percentage gain to get back to even.
So what I was thinking about in March, 2020, at the time, I think the stock market was down like 30, 33%, something like that. So I said, Hey, if the market's down 33%, so let's say it started, the price was a hundred, now it's down to 66. To get back to a hundred, it has to go up by 33, which is roughly 50%. So a 33% drop requires a 50% gain to get back to even.
So I asked Twitter a question for Intuit. I said, Hey, the market's down right now about 33%. How long do you guys think until we recover, until we hit a new all time high?
I said, less than a year, one to two years, two to three years more than three years. So I just kind of threw those out there. I thought there were decent options, but I don't know what your answer is, but let's just think about, try and put yourself in March, 2020.
At the time, I thought it was going to take probably two years to recover one to two at least, so we can back out what your expected return is. Then if you know, okay, we're down 33% to get back to even, we need to go up 50%. That means if you think the market's going to take one year to recover, your expected return of buying in that moment is 50%.
Let's say you bought, and then one year later it's back to its old price. You just got a 50% return. That's mathematically guaranteed. If you're like, oh, it's going to take two years, then I'm just going to do a linear extrapolation of this.
Just take the 50 divide by two, that's 25%. I mean, it's not really that if you're doing compounding when you multiply, it's probably 23%. It's a little bit lower. So like 23% times 23%, 1.23 times 1.23 is probably 1.5 or something like that.
So you get my point though. Just take the number, divide by the number of years you think it's going to take to recover, and that's how you back out your expected return. So even if you think, oh, it's going to take five years to recover, that's still roughly a 10%. I mean, it's probably 8% with the compounding, but that's roughly a 10% expected return.
And who doesn't want 10%? So if it's March 23rd, 2020, and you're like, okay, I think the market will be recovered within five years that seems reasonable from this type of pandemic, then you should back up the truck and buy, I mean, a 10% return.
Who doesn't want that? So you can do that with any size crash, and the deeper the crash, the better the returns look on coming to the recovery and what really happened. So everyone's like, okay, well, you talked about this 50%. What really happened? Well, within six months we were back in a new all time high.
The actual annualized return you would've gotten was over a hundred percent. Literally one of the greatest. Anyone who bought March 23rd, 2020 had one of the greatest returns they're going to ever see in their life. That one year return is insane. I was looking at the data, I was like, I don't think we'll ever see better one year returns the rest of our lives, possibly the best ones I can find before that were 1930 in a one year period was 1930s where people, if you bought in June 32, the bottom of great depression, that one year returns better.
But I don't think there are many others that beat that. So there's something to keep in mind. So that's the framework I use. Hey, we're down this much. Okay, let's try and make a good educated guess about how long the recovery is going to take. So how much do we need to gain? And we need to gain 50%.
Oh, it's going to take three years. Okay, 50 over three, that's your expected return, and who doesn't want a 15, 16% return on their money? That's a huge return in this environment. It's obvious. So that's kind of how I think about it. And you're like, well, Nick, what if it takes longer than three years? What if it takes 10 years?
Well, then, yeah, then you only got a 5% return, and that sucks, but still 5% is better than nothing. Where else can you get 5%? You going to go put it in bonds? There's no argument out of this. There's no argument that can make anything make sense. Your only choice was to really buy if you're rational and you want to grow your wealth well.
Taylor Schulte: I just love how it puts the investor in control of some things that may feel out of control. Of course, we don't know the future, but again, during these time periods, during these catastrophic time periods, it feels like the world's ending. In hindsight, it looks like, oh yeah, it makes sense.
We recovered quickly and we came out of covid fairly easily here, but when it was actually happening, it doesn't feel that way. It's hard to actually go and put that money to work, even though we know that that's probably what we should do.
So I just love that it gives investors control over something that they may not feel like they have control over. They can make an educated decision or an educated opinion about what might happen. And I just love the optimism of it as well, instead of thinking, oh my God, everything's going to go to zero here. The world's going to end. It's like, let's reframe the upside is what you call it.
So I really, really like that. And again, we can use history as a guide here. I don't have the numbers in front of you, but on average it takes I think 2, 3, 4 years for markets to recover. And so to your point, even if we said, okay, well what if it takes five years, it's still an 8% annual rate of return here if we put our money to work today.
Nick Maggiulli: Yeah, exactly. And so I think that's the thing is just to when you're doing this stuff, rethink it, and you're like, oh, what if it goes to zero? Well, your investment portfolio is not going to matter. Your investment portfolio needs to include canned goods and guns and who knows what else? It's not important.
It's funny because the economic effects of a crash are far more important than what happens to your portfolio, but no one thinks about that. The real reason the great recession in 08 was so bad wasn't because oh, market went down 50%.
No, it's because all these people lost their jobs and companies went under, that's why it's bad. And other people lost their jobs and people, there's all this economic activity that stopped the thing about it. It went down 50% into March oh eight, and then it kind of bounced back out of that what didn't start in what?
September 08, within six months, we hit the bottom and then we're out of it. Six months is not that long. I mean, what happened in 2020 was even more of a cakewalk from February 19th to the bottom, March 23rd a month. It's like we went from a top to a bottom and then back to a top within the six months.
It's literally the easiest crash. I mean, trust me, it wasn't easy seeing your portfolio dropped 10% in a day, but if I have to pick, that's the easiest crash out there, one month of pain and then six months later it's over. What that's unheard of in the US history, that big of a crash that quickly and then that big of a recovery that quickly.
Taylor Schulte: Right. Well, that segues nicely into my next question, which is what about markets that don't recover quickly from market crashes? Sure, we've got these market crashes in recent history here, 08 09 in March of 2020.
But sometimes when we talk about these things, Japan is often brought into the conversation where the stock market was below its December, 1989 high for the last 30 years, it's done nothing for 30 years. Greece has had similar struggles since 08, 09. So what about these markets that don't recover quickly? What if there is a crash here in the US that does not recover in 18 months or three years or even five years?
Nick Maggiulli: So I mean, the US has had multiple times where it wasn't hired think 10 years after a crash. I mean, even if you adjust from inflation and include dividends, I think there's only a couple, maybe three or four where they had a 10 year period where 2000 to 2013 is one of those periods.
I think 1930s, it took like eight years. Something. There are times where this happens, but about those markets don't recover as often. This is why we diversify, right? This is why I don't think people should only own US stocks. Imagine a Russian investor beginning of 22 in one month, they saw the market decline by 80%.
That's catastrophic in one month. Even the Great Depression, which was a 90% decline, it took from September 29 to the summer of 32 to get there. So don't get me wrong, that's still terrible and it's like destroys you mentally, but in one month that just, it's unheard of.
It's almost, it just fundamentally changes everything you believe in within the course of a month. So what do I say? It's like you have to be diversified. You have to have own other assets, and I've never seen a global crash and then no recovery across a global scale.
Now, we may have that one day, but if we do, once again, your investment portfolio is probably not the issue. Great depression affected everyone, so you would've been screwed because it was so bad everywhere. But what do you do?
You can prepare, you can try and take it doesn't matter. I think the quote is, doesn't matter how seaworthy your boat is in a typhoon, you can try and make every preparation, all this and that, but if you come through a typhoon, it's going to be terrible. Either way you're like, oh, I was a hundred percent bonds, your portfolio didn't drop as much, but now you can't find a job and so you have to just sell your bonds.
It's better to have some wealth, but you can't live for the exceptions. You can't invest based on the 1 in 100 year event. If you did that, you would never, it would be very difficult to build wealth.
So what I say to people is like, okay, first be diversified. Secondly, I think a lot of these things are snapshot judgments. What I mean by that, if you were a Japanese businessman who sold their business in late 1999, had cash and then went a hundred percent into the Japanese stock market, which at the time was the most highest cap ratio market ever.
So let's say you did a hundred percent of the Japanese stock market. Yes, you got screwed very badly. You had made the worst investment decision probably in human history. However, if you've been buying over time in Japan, I showed this in the book in chapter 17, just say you invested.
I said, a dollar a day, whatever. I make that up. I'm just trying to get some sort of dollar cost averaging going on. You invested a dollar a day from 1980 through it. There are going to be periods even with the crash where there's going to be periods where you're below your cost basis, where you're underwater, and there'll be periods where you're above it and it's not as bad.
Now don't get me wrong, it's not great if where just a hundred percent Japanese investor, just dollar cost averaging over time. It's not great for you. You weren't diversified, but it's not as, oh, I had a 30 year period where I was underwater. That didn't happen unless you put all of it in once and you never bought again. So for people who are accumulating assets over time, it's not as much of an issue.
Taylor Schulte: One of the quotes I've seen you reference a number of times is from Jeremy Siegel, and I'd love to end here and just hear just some of your thoughts on this quote, which is, fear has a greater grasp on human action than does the impressive weight of historical evidence. Can you share your thoughts on this quote and why you've used it in several places?
Nick Maggiulli: Yeah, I think it's easy to be scared when you see headlines and you see stuff like this, but if you actually look through history, there's always going to be some sort of headline or something to be, there's always a reason to be afraid.
And I think what my colleague and boss Michael Batnick likes to say is, there are many reasons to sell. There's always going to be an excuse for you to get out of the market every time. Oh, right now it's World War II in Russia, and maybe that's a valid concern. Maybe that is going to cause tons of chaos.
But a year before it was something else and the year before it was something else, and there's always something going on that could cause problems. And so I try to say, why am I so optimistic? Because the record of history, at least over the last few hundred years is a positive upward to the right slope across almost every measure we can find.
So for me, it's just about grounding myself in that and remembering evidence matters a lot. People are afraid of, for example, flying on airplanes, do you realize that you're more likely to die in a car than an airplane? It's not even close like the numbers, they're not even close.
So don't get me wrong, airplanes can be scary. I get that, but at the same time, the data shows flying in an airplane is far, far, far, far safer than flying in a car or I'm sorry, than driving in a car. If you're flying in a car, then it's all separate question, but you get my point. And so I think when you just look at data, it's a great way to kind of philosophical way of looking at the world that I enjoy.
Taylor Schulte: Yeah, I probably shared it here on the podcast before, but my dad is a retired airline pilot. He's been flying since he was 18 years old, and I grew up with this weird fear of flying, so I heard those statistics over and over and over again in my household. Wrapping us up here, we already referenced a few times, your new book Just Keep Buying.
I'm giving away 15 copies to Stay wealthy listeners, as I mentioned in the intro to this whole conversation today. But just take a quick moment, tell us a little bit about the book. What drove you to write it? How was the writing process? Are you ready to write your next one? Where can people find it? Just love to hear a little bit more about it.
Nick Maggiulli: So you can find the book on Amazon, and the reason I really wrote it was because of Covid in some ways. So Covid first hit March, 2020. I was in New York City, saw the big first wave, then the curve flattened. I was like, oh my gosh, guys, we did it. We flatten the curve. It's over foolish, obviously.
And then Memorial Day happened, and then the rest of the United States got it, and I'm like, oh my gosh, this is dreadful. Like, oh, this is terrible. But I'm like, and then the curve came down. I was like, okay, now we flatten the curve.
It had to hit in New York, then it had to hit everywhere else in the us so we're good now, very obvious. So I was still very optimistic. Then the first variant in December, 2020, that's when cases went through the roof relative to that time.
I've never seen so many cases. I'm like, this is crazy. And then I got super, super pessimistic and I was like, this is going to last forever. And I was like, I have to use this time. I have four years of material now I've written on. I just need to organize it into a general all purpose, personal finance and investing guide where I'm just answering questions and trying to find the truth.
There's a lot of things out there. We're told, Hey, you're not saving enough for retirement or debt's always bad, or You should max out your 401k, or You should buy the dip, right? There's all these different things we're told, I think through the media and in the culture where I'm like, is that actually true though?
And so I just questioned a lot of these things and I analyze it with data, and I go to show that a lot of these things that we used to believe are just not true.
I mean, the data doesn't support it. And so that's kind of why I wrote the book as a way to help people and say, Hey, look, here's what the data shows. Data's not everything. I know behavior matters. I'm not going to sit here and say it doesn't.
But at the same time, I wanted to highlight how much this can help people, because I think a lot of the messages we get are not based on actual facts and figures, it's just based on what people believe. Oh, that sounds right. It's like the Earth's obviously at the center of the universe. You think that was believed for so long by humans, and then someone comes along and says, no, based on this, it's not.
And obviously people are not okay hearing that, but that's kind of what I'm trying to do here in personal finance and investing is a lot of these things we talk about, they may sound like they're right, but when you actually dig into it, you can't prove those things.
Taylor Schulte: I love it. The book was fantastic. I appreciate you sending me a copy. I've been following your work for a long time at your blog of Dollars and Data, which we'll link to in the show notes as well as the book. The show notes can be found by going to youstaywealthy.com/150.
Nick, I just want to say thank you, number one for all you do for this profession, all the writing you've done over the years, everything that you've given us. Thank you for joining me on the show today, and congrats on the big book launch and yeah, I appreciate it and hope to have you on again soon.
Nick Maggiulli: I appreciate it, Taylor. Thank you for that. I really appreciate the kind words and just trying to help people, and I enjoy it because I like helping people like doing this stuff, and it's fun for me. I love doing it. I did it for years without getting paid or anything. Just because I love it, I'm going to keep loving it, right?
It's one of those things where if you're into this stuff, that's why you're listening to podcasts, you're reading articles because it's fun. It's like, wow, there's all this stuff out there. It's very difficult to understand, but it's fun to learn about.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.