Happy New Year! To kick off 2021, I’m digging into the three BIG topics I know are on every investor’s mind right now:
- Small Cap Value Stocks
- The Dow Jones Crossing 30,000
I’m sharing updates on each + what they mean for your retirement planning and investment portfolio in 2021 and beyond.
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Diversification Means Always Having to Say You’re Sorry [Brian Portnoy]
- Small Value Stocks vs S&P 500 [YCharts]
- Investing at the Top of the Market:
- Bitcoin Historical Returns [Charlie Biello]
Value Stocks, Bitcoin, and Investing at the Top of Market
Taylor Schulte: Welcome to the Stay Wealthy Podcast and happy new year. For those that are new to the podcast, I'm your host Taylor Schulte, and I really appreciate you tuning in today.
This show has grown a lot in recent months and I'm really thankful for everybody's support and engagement. I have some great things lined up for 2021. It's really gonna be a fun year here on the Stay Wealthy Podcast.
To kick things off for the new year, I'm digging into three big topics that I know are on everybody's mind right now. Small-cap value stocks, Bitcoin and the Dow Crossing 30,000. I'm sharing updates on each and what they mean for your retirement planning and investment portfolio.
For all the links and resources mentioned today, head over to youstaywealthy.com/92.
If you're a longtime listener of the show, you know that we don't believe in market timing around here. We don't believe anyone has a crystal ball and don't believe anyone can accurately and consistently predict the future.
However, after my four-part series on investing in stocks, which I published last September, I think I might be changing my mind a little bit in part three of that series. You might remember me highlighting that small-cap value stocks had been underperforming the S&P 500 for 12 years or so, which I followed up by saying the following quote.
This is not a recommendation, but personally I'd view the current underperformance of value stocks as an opportunity. They're unloved and beaten down. There's no cheery consensus flying around. If I'm trying to identify asset classes with higher expected rates of return in the future, I might point to value stocks as one of those asset classes.
And I'm happy to report that my prediction couldn't have been better timed from October 1st through December 31st. Small-cap value stocks measured by the MSCIUS a small-cap value index, small-cap value stocks returned 30% while the S&P 500 was only up 11.5%, a pitiful 11.5% return in a three-month time period.
In other words, if you had a million dollars invested in one of those super boring low-cost vanguard S&P 500 index funds, you could have missed out on a quick $200,000 gain. I'm obviously being a bit sarcastic here, but yes, those are the actual returns of those indexes in the fourth quarter of 2020, and yes, I did make that comment about value stocks just last September, but no, I don't really believe that I successfully timed the market and predicted the future.
There's one thing that I did say during that four-part series, which I did have conviction in, and I did see it play out over the last three months. When these periods of outperformance occur in value stocks, it happens very quickly. So quickly that if you're on the sidelines, you don't even know how or when to react and if you should invest, if this is a longer-term trend or if it's just a one-off event.
Which is exactly what happened last quarter and in an insanely quick turnaround that resulted in an outperformance that was more than double the S&P 500, will small-cap value stocks continue to outperform in 2021 and beyond?
I have no idea. Things can quickly turn back the other way, which will just prompt me to delete this episode and pretend that we never published it, but things can certainly flip. I'm not suggesting that I have a crystal ball and that this is now a long-term trend and you should just go dump all your money in small-cap value stocks.
What I will say though is that I don't believe the S&P 500 or any single index for that matter will always outperform. Tech stocks will not go up forever. Tesla will not go up forever. There will be a day or a year or even multiple decades where international stocks do better than US stocks or where large caps do better than small caps or even where cash under the mattress does better than bonds.
The S&P 500 is great of an index as it is. It isn't just some magical unicorn of an investment. It's not immune to long periods of underperformance, which leads back to the conclusion that I had made during that series last September stating the importance of how a diversified portfolio grounded in academic principles.
The challenge is that staying committed to a diversified portfolio is really hard for us financial advisors. Diversification means we are always having to say, I'm sorry to our clients. There will always be asset classes in a diversified portfolio that goes down. If you know anything about loss aversion, you know that the pain that we feel with losses is disproportionately larger than the joy we feel with gains.
Naturally, investors will always put extra attention on the losers and their portfolio and the pain and discomfort that that brings them often overshadows the fact that there's plenty of other things in their portfolio that are doing well.
As humans, we inherently just obsess over small pieces of things rather than zooming out and looking at the whole pie. It's easier to dissect or complain about one little thorn in our side than try to make sense of all the different moving parts together, and that can be said with investing, but it could also be said in relationships and careers and politics.
Really almost every area of our life, as my friend and financial author, Brian Portnoy wisely states, ultimately the math of diversification makes sense. It's this psychology of diversification that's muddled the path forward is not to rethink the former, but to accept and think through the latter. It is not a smart alternative to concentrate one's portfolio in what one predicts will be the hot dot.
At the same time, it's also unfair to ourselves to ignore that diversification is often a bitter pill to swallow even when it's good for us. Contrary to how I started this whole segment, we will together as a community here continue to dismiss market timing and this notion that someone has a crystal ball and can accurately and consistently predict the future.
Also, hopefully we can all agree to start this new year off by really evaluating your investment portfolio to ensure that you're properly diversified, that every asset class in your portfolio serves a purpose, that you're not taking unnecessary risk and that you own asset classes that are undervalued and have been beaten up lately.
Remember, now is the time to make sure that you're invested properly, not when the next recession hits and you're staring at double-digit losses and you're losing sleep and now you're on the verge of making an irrational decision with your money that you won't have time to recover from.
Speaking of asset classes serving a purpose in your portfolio. Let's pivot to topic number two for the day, which is Bitcoin. As of this recording, Bitcoin is approaching $40,000 and in case you haven't been following this asset class, one year ago in January of 2020, Bitcoin was trading at about $7,000.
To put this all in percentage terms, in 2020, Bitcoin was up just over 300% and here in 2021 it's already up another 38% small-cap value. Stocks are looking pretty boring at this point. Aren't they given this huge run up and people running around social media and through the holidays and family and friends and sharing how much money they've made investing in Bitcoin?
More and more investors are of course asking themselves and asking their trusted advisors if they too should be investing in Bitcoin. Here are my 3 cents. First, the biggest difference between Bitcoin and other asset classes like US stocks, small-cap value, etc. The biggest difference aside from the obvious things like Bitcoin being a digital currency that doesn't produce cashflow, the biggest difference I see is the lack of historical data.
We only have about 10 years worth of data on Bitcoin versus a hundred years of data on the US stock market. Now, I'm well aware that the next a hundred years could look very different than the previous, but I also know that history has a tendency to repeat itself and I also know that more data is always better and more helpful.
Whether we're talking about investing or science or medicine or even trying to figure out which one of my two boys instigated the fight, more data is always better. 10 years of data just isn't enough for me to rely on to make smart prudent investment decision.
Let me say this loud and clear. I don't wanna get a bunch hate mail here. I'm not saying that Bitcoin is bad or it's a scam or you shouldn't invest in it. I'm just saying that we as prudent smart investors, we have a lot to learn still, and I just don't hear this being acknowledged in the cryptocurrency Bitcoin community.
You know, 10 years is nothing, and yet there are people that I have a lot of respect for out there sharing research pieces that say something along the lines of, if you only had a 5% allocation to Bitcoin in a traditional 60% stock, 40% bond portfolio, you would've had this massive outperformance of X percent, to which I immediately said you could literally say that about any concentrated position.
I could create that same exact chart and publish the same research, but swap out Bitcoin for let's say Tesla stock. I think a 5% allocation to Tesla stock and a 60-40 would've actually produced better results.
Well, I think Bitcoin is here to stay and cryptocurrency and all these different currencies, they serve a purpose. I just fear that it's being presented the wrong way to investors and you just have to be careful.
Which leads me to my second point because I view this as a speculative asset class that some of the smartest people I know in finance still don't fully understand. I consider this to be the perfect investment for your cowboy or cowgirl account.
Your cowboy cowgirl account should make up about 5% of your investible assets, and that's your designated place to speculate and invest in things like Bitcoin and Tesla and in other concentrated positions. If you have a solid retirement plan in place and your cowboy cowgirl account goes to zero, your retirement shouldn't be in jeopardy.
On the flip side, if you find yourself with a 400% return in your cowboy cowgirl account, well it might allow you to have a little extra fun in retirement or maybe even do something good with it like donate more money than you had planned. And you might notice I'm using the same 5% number as the people I'm critiquing who are creating marketing materials and advocating for a 5% allocation to a 60 40 portfolio. But I'm just setting different expectations, which I think is really important here.
Again, for someone with a buttoned up retirement plan is on a good track, a 5% allocation or less to a speculative investment really shouldn't put their retirement in jeopardy if it goes to zero, so I just say risk what you're willing and able to lose.
Don't look at the last three years of data and expect that to happen over the next three years. My last comment on Bitcoin is mostly for those listeners who are over age 50 and nearing that work optional phase of life, which actually surprisingly is a really large percentage of our listenership here over age of 50, nearing that work optional phase of life, for most of you in this phase, this is the time of your life where you have to manage risk very, very carefully.
This is not the time to try and hit the ball, the fence and reach for three, 400% returns. You had the first 30 years of your working career to take those risks and to swing for the fences and to make mistakes and recover from them.
Now is not the time to do that, and I realize how hard it is to sit back and watch these 30-year-old tech nerds make millions of dollars trading cryptocurrency, but it's important to stay focused on your financial plan and your needs and goals.
I know this is boring, but it's really important. Remember, it's much easier to recover from a big mistake while you're in the wealth accumulation phase of life and you have time on your side to recover and reinvest and take advantage of compounding returns.
And trust me, those tech nerds, they will make a mistake if they haven't already, they will experience a big loss. It's just gonna happen. You can't have your cake and eat it too. Now, Bitcoin has had giant returns because it's a giant risk. Risk reward go hand in hand. If I'm gonna take big risks, I'm gonna demand big returns because I know that eight out of 10 of my risky investments are gonna fail.
If you've ever spoken to venture capitalists or angel investors or you watch Shark Tank, those investors will be the first to tell you that they expect 80 to 90% of their deals to fail and go to zero, but it's that 10 to 20% that hit it really big that more than compensate for those losses from the failures.
The important point here is that they have a system and a process in place for taking those risks, and they know that if they stay consistent and adhere to their philosophy, they're gonna come out ahead over a long period of time.
For the rest of us, especially those that are nearing that work optional phase of retirement, taking that kind of risk with a large percentage of money just isn't in the cards. Those five to 10 years prior to retirement and those first five to 10 years in retirement are the most vulnerable time for your financial life.
So if you find yourself feeling like you missed out, you've got FOMO here and you're wanting to get in on the action, that's fine. I would just encourage you to treat an investment in cryptocurrency or Bitcoin like any other speculative concentrated investment and just set your expectations accordingly.
Again, not because I think Bitcoin is going to zero and that it can't double or triple from here, but because it's one single concentrated asset class that let's just be honest, like we still don't know that much about it, enough about Bitcoin.
Let's wrap things up by talking about the Dow Jones crossing 30,000 more specifically, I wanted to address this question that I continue to get about investing at the top of the market. The market has been screaming upwards for the better part of 11 years now, and many people just seem to think that it can't continue and that we must be at the top. We must be hitting a peak here soon.
I've been hearing these comments about the market being overvalued for about 11 years. Ever since the 08, 09 recovery, people have told me the market can't continue to go up. This just doesn't make sense that you know it's being propped up by the Fed, it's gonna crash, etc. etc., and here we are.
The Dow just crossed 30,000. Let's not forget something. It has not been a straight line up. We don't have to even go back that far to highlight how difficult of a journey it's been over the last 11 years. In March of last year, we saw US stocks drop over 30% during what many have coined the covid crash of 2020 on March 9th, 2020.
We witnessed history. It was the largest point drop ever for the Dow Jones, and it didn't even stop there. It was followed by two more record-setting drops on March 12th and March 16th. The covid crash of 2020 in included the three worst point drops in US history.
In 2020, we saw the Dow Jones go from a low of 19,000 to a high of 30,000. We crossed 20,000 and 30,000 in the same year as we celebrate the Dow going from 7,000 in 2009, all the way to over 30,000 in 2020.
Let's just not forget about all the challenges that we face along the way. Let's also not forget that most investors did not experience a positive result during those 11 years. Many investors probably didn't experience a positive result just last year because as you guys know, emotions get the best of people.
We get really irrational and emotional with money during difficult time periods, and there've been a lot of them over the last 11 years, so a lot of investors, even though the market's been going up panicked and sold and didn't know what else to do, they didn't know when or how to reinvest.
Yes, the market has increased in value over the last 11 years, but I just wanted to be sure to put it all into perspective. Now, back to this dilemma of investing at the top. Is this the top? I don't know. Could the Dow go to 50,000 in the next few years? Sure. Could it go to 10,000? Absolutely.
You know me well enough by now that I hate predictions, but I do love data, so while it's anyone's guess where we go from here, I thought I would just share some data with you.
There's an interesting chart that was floating around coupled with a really good article put out by JP Morgan, which I'll link to in the show notes. If you wanna check it out. Show notes can be found at youstaywealthy.com/92 in this chart. The data runs from 1988 to August of 2020, so not a hundred years of data, so keep that in mind, but that's 30, 32 years of data here.
Since 1988, money in invested when the S&P 500 is at all time highs has outperformed money invested on any given day. For example, if you invested a lump sum of money on any random day since the start of 1988 and you reinvested all of your dividends on average, your one-year total return was 11.7%.
However, if instead you invested that lump sum on a day when the s and p 500 closed at an all time high, your average return was 14.6%, so about 3% higher on average. Similar results were witnessed over longer periods of time as well. You can take that same example but hold it for five years and the person investing on any random day underperformed a person who bought when the S&P 500 closed at an all-time high by about 7%.
Again, I'll link to this data and the show notes, which can be found at youstaywealthy.com/92. Will this always happen? Will investing at all-time highs always outperform? Of course not, but momentum is a powerful thing. There's a lot of wind behind the back of investors in the stock market right now. The general conclusion here is not to be afraid of all time highs.
As long as you're a long-term investor, new, all-time highs happen in clusters that can last a decade or even more. According to Ryan Derick, who is IPL'S financial chief market strategist. Ryan goes on to say that given that this cluster of new highs is only seven years old, history would suggest that we don't bet against several more years of new highs.
Now, it's his job to make these types of predictions and he's good at his job, but I'd just be careful latching onto that type of conviction. In my opinion, the most important thing to remember is just simply why we invest money in the public markets to begin with.
We take our money out from underneath our mattress and invest it in the markets so that we can combat inflation. Inflation is one of the biggest threats to your retirement. Well, it's fun to try and guess where the market goes from here, and it can even be a bit scary when it feels like we're at the top and we're due for a correction.
It's more important to make sure that we know why we're investing money in the first place. It's important to make sure that we have the right allocation in place and allocation that you can stick with an allocation that helps you sleep well at night, an allocation that gives you confidence in your retirement and matches up with your financial plan.
Most importantly, an asset allocation that outpaces inflation while taking an appropriate amount of risk. Remember that when you try to time the market, you have to be right twice. You have to know when to sell, and then you have to know when to get back in, and some people have been lucky and they were able to do both of those things and time it perfectly, but nobody has been able to do that consistently time and time again, and most people just end up learning these lessons the hard way.
My last comment here is just to acknowledge that you might not need to have all of your money invested in the public markets. Inflation might not be a big risk to your retirement. You might have more money than you need in that case. Sure, take some money off the top if that helps you sleep better at night.
Or maybe start with taking just a hard look at your current allocation. Maybe you just don't have the proper allocation, or perhaps there's an opportunity to sell something that you own that's done well and buy something that's been beaten up.
But at the very least, I would just encourage you just make sure that your decision is part of a bigger, longer-term plan and not just a quick emotional response to something that you can't control.
For all the links and resources mentioned today, head over to youstaywealthy.com/92. Thank you all for listening. Happy New Year, and I will see you back here next week.
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.