The Wiser Financial Advisor: Market Update Q & A #149

We thought it would be appropriate to do a bit of an update and give you an opportunity to hear what we have to say and what the experts have to say about finding yourself in a correction here in 2025.  Josh Nelson CFP® and Jeremy Busch CFP® dive into the latest stock market trends and discuss the recent wave of volatility we’ve been experiencing. Their insights are especially timely in today’s ever-changing financial landscape. 

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Podcast Editing: Tim Leaman/info.primegen@gmail.com

Transcript

Hi Everyone, and welcome to the Wiser Financial Advisor show with Josh Nelson where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, a Certified Financial Planner and founder and CEO of Keystone Financial Services. Let the financial fun begin!

Josh: I’m here with Jeremy Bush, who is a CFP with Keystone Financial Services. We are here in April of 2025 and in the midst of a market correction that we didn't expect—not that anybody can ever accurately expect these to happen. There’s volatility in the market for a lot of different reasons, a lot of it due to tariffs. We thought it would be appropriate to do a bit of an update and give you an opportunity to hear what we have to say and what the experts have to say about finding yourself in a correction. Regardless of the reason, there are more corrections to come, as there have been in the past. One of the things that's really critical during a time like this is to maintain perspective, so we're going to go through some material here to help us look back into history at other time periods that were rough. 

So, as far as where we are in the market right now, we’re in a correction. To define what that is: a market correction could be in the bond market and the stock market and the real estate market and the cryptocurrency markets. Lots of different areas could be in a correction, but generally it’s defined as a 10% or more drop in the market. This is not a bear market, and the good news is that corrections (knock on wood) 80% of the time don't turn into bear markets. A bear market is a 20% or more drop in n whatever market you're watching. Sometimes that can even turn into severe bear markets where you're down 30% or even 50%. We’ve seen markets like that and we'll be going through some perspective here on some history. 

Remember back during COVID, the dynamic and how far the market dropped in a very short amount of time? Also the financial crisis of 2008. That was a scary time for the market, but the entire financial system was in question back then. It looked like there was no hope on the other side of it. Things did bottom out, but every correction has been followed by an upswing in the long run, so we'll be going through some of those numbers today. 

The markets have averaged about 10.8% since 1970, but if you go back to the 20s, it's around 10.4%. So it doesn't change a whole lot. You can look at decades and decades of market history in the stock market, the bond market, the real estate market, and world events, and all tend to even themselves out overtime. The market tends to drop when there's a lot of uncertainty, and that's what we're seeing right now. The market hates uncertainty. That's why you're seeing the sell-off on certain days that we saw this last week. 

The market clearly does not like tariffs, at least in the short run. So that's what we're seeing as far as market activity. But nonetheless, if you had invested say, $10,000, back in 1970, just kind of threw it in the S&P 500 and never did anything, just let it sit, never took money out and never put more in, you would have ended up with 2.8 million dollars. That is despite 9/11, despite the pandemic, despite the financial crisis, despite Black Monday back in 1987 when the market dropped 20% in one day. Despite how many wars since then and how many shock events, your $10,000 would have turned into $2.8 million over that period of time.

Jeremy: Now, obviously there would have been a lot of times that were very uncomfortable, kind of like now. But that’s a good statistic as far as staying in the market, even if it doesn't feel good.

Josh: Yeah. Not because we know what's going to happen by any means, but we also know that during other bad markets, people who stayed the course did better. If your pilot speaks to you during a plane flight when you're experiencing extreme turbulence, he or she can say whatever they want to, but it still doesn't feel good if the turbulence keeps going. So let's just acknowledge that we don't like it either, but that's the environment we're in right now. The reason why staying the course makes sense is not because we know how to time the market, and neither do you, and neither does anybody else. It's not that there's somebody else out there who magically knows how to get in and out of the market over time or knows when something's gonna happen. 

Could you have predicted 9/11? Could you have predicted the pandemic? Could you have predicted during the pandemic losing 33% in the S&P 500 in the span of what, 3 weeks? And then ended up being positive for the year? So staying the course looking back to 2020 as an example, that was the last really severe draw-down we had in the market. You would have been down 33% at the worst within a short amount of time, a month or so. But had you stayed invested from January 1st to December 31st of that year, you would have been up 16%. As scary as that bear market was, another one was in 2022. I would be shocked if any of you remember that bear market in 2022. And if you remember it, my guess is you can't tell me the world events that were happening, with Silicon Valley bank collapsing, and the war in Ukraine just starting up. At that time, there were interest rate increases and inflation. The worst of it was down 25% from January 1st to December 31st. But had you stayed the course, in 2023-2024 you would have made 24% in 2023 and 23% in 2024. That’s just looking at the S&P 500. 

We don't recommend that people just invest in the S&P 500. We recommend you take a more broadly diversified approach. The whole point though is that even after you hit bad markets, it doesn't mean that things are going to stay that way. Or get even worse, and they might. I mean, there are some time periods, like the financial crisis of 2008, I remember vividly that not only was the market going down, but it kept going down and kept going down. It took about 18 months until the bottom hit, from October of 2007 to March of 2009. And then, the rest is history. Things came back and people would have done fine for the rest of that next decade.

Jeremy: Yeah, I have this conversation with clients all the time, that on average, corrections happen about once a year. So, 10% down once a year, like we're saying, about 80% of the time those corrections don't lead to bear markets. They feel terrible while you're going through them, but then a year or two down the road, you forget that it ever actually happened.

Josh: The average correction since 1980 was about 14%, which ironically, is about where the S&P 500 is right now in our correction that we find ourselves in, down 14%. It doesn't feel good, but this is kind of an average correction. Doesn't mean it won't get worse. I mean, there is going to be a bottom at some point, but just recognize that this is not out of the ordinary, even though the details are always different as far as why the correction happens. But that doesn't mean that it's unique in the sense that they do happen about once every 18 months or so. So, over the long run, going back the last 30 years, the last 60 years, the last 100 years, the average rate of return to the stock market as evidenced by the S&P 500 will be about 10% a year. Nothing guaranteed about that, by any means. You would have been through a lot of corrections, a lot of bear markets, to get to that point.

Gold has gone up a bunch in the last couple years. Some people are thinking, ”Maybe we should put all of our money in gold.” But the reality is, putting all of your money in one category is not a great idea. And gold has a lot higher volatility than the stock market over time. Gold has experienced long periods of time where it's done very poorly. That doesn't mean don't invest in gold. A lot of our client portfolios have gold as part of the portfolio, as part of an asset class. 

A lot of people say, ”My home has been my best investment.” But unless you got really lucky with timing, the average price increase on a house has been about 4% average annual return since 2007.  You look at all these numbers and you see the perspective come back instead of looking only at what's happening right now. The point is, putting all your money in one category is probably not a great idea. Over the long run, the stock market has been the most reliable, and the real estate market too. Many people have built their wealth that way, doing it in a diversified way. Having the whole portfolio of rental houses across the country, if you can afford to do that, would be a fairly diversified portfolio in real estate, and over time, stocks and real estate typically end up about the same.

Just to be clear, though, home prices alone, like the house I own and the one Jeremy owns, your house on average would have gone up 4% because we don't have any rental income. Now, if you're renting out the basement, and you maybe occupy a few rooms in the house, that's probably not what most of us are going to do. That could be a pretty good investment, because of the income portion of it.

So, getting back to the markets, a bull market tends to follow a bear market. There's never been a time when there's been a bear market that wasn't followed by a bull market. The bulls end up winning over time simply because bull markets go up more than bear markets lose, even in extreme time periods like 2008, when the market was down by about half. On the other end of that, when the fire burned out, we saw a bull market of 400% increase over about a 10 year time frame. Then in 2020, the pandemic was the trigger of what caused another bear market for about a year. That bear market lasted through COVID and then, we saw a big increase. In 2022, we saw another bear market followed by a couple of years of increase. So this is just the story of the market over a long period of time that surpasses politics, surpasses who was president and what all the details of it are. We know that those things are going to change over time. But looking at history, the most successful investors over long periods have been people that have stayed the course and not made huge moves or huge timing decisions during that period of flux. 

Let's say that you were just the luckiest person in the world. And you cashed out all your investments in in, say, February of this year when the market hit a peak. So maybe you were super lucky. When do you get back in? Looking at a lot of these numbers, you find that almost always you end up seeing increases within a fairly short time.

Jeremy: So, in theory, it'd be great to be able to get out and go to cash at the right time and then buy in at the bottom. But the timing of that is near impossible. I think even Warren Buffett says he's never met someone who can time the market. The fact of the matter is that the best five days of a market rise typically happen within the first two weeks of the market reaching the bottom. And that is next to impossible to time, right? 

Josh: Yeah, because you don't know where the bottom is until well after the right time. I mean, we didn't know. It's easy to say in hindsight with  the pandemic, for example, when we were down 33%, that in a month or so it would rise. But back then, predictions were saying things were going to get way worse. Way worse, like, we're going down 50 percent, 60% and going into a depression. That was the prediction at the time—that this is probably going to be like the Great Depression; it could be an entire decade of terrible economy and market and so forth. But if that was what you bet on, and you got out, you would have missed out on the opportunity to be up 16% by the end of the year. 

In an extreme situation like that, it's hard when you're in the middle of, just like if you’re on a really turbulent flight. When you're sitting there and you're nauseous and the plane’s going all over the place, nobody can rationalize it away, because you don't know when it's going to be over.

Jeremy: Yeah, that's the toughest thing. I know it doesn't feel comfortable to hear, but truly one of the best things you can do is just stay in the market, stay diversified. History tells us it's just a matter of time before it comes back. The tough part is, we don't know how long that's going to be. And so, yes, there are things that we can do to plan for the worst, but staying in it is ultimately going to be what the disciplined investor does.

Josh: And that is what it comes down to, is just being disciplined and not letting emotion shake us. It can be very tempting to do that. Fidelity has done studies on this.  They know how to pull reports. They know the average rate of return in people's accounts. And they've found that the more often you log into your account, the worse your rate of return. I bet if we went to Schwab or Merrill Lynch or anybody else, they would find the same thing. The more often somebody logs into their account the worse the rate of return. Why would that be? Because the more often you feel like you gotta do something, whatever that was probably wasn't very smart. 

You don’t have to be trying to gain something because of a bear market; it could because of the bull market. Whatever it is, it's letting emotions drive the decisions and getting away from a well thought out, diversified plan that's built for the long run. Fidelity knows that the best category of investor with the best rate of return is actually dead people, believe it or not. Why? Because they can't log in. They're not going in there and messing with stuff. That doesn't mean that you shouldn't do something different. It's your money, ultimately. We're all gonna make our own decisions with that. But it is something to at least think about.

Jeremy: Which is also where a good financial planner can help you out, by taking some of that emotion out of it and reminding you that we do have a plan and that the plan is still a good plan.

Josh: Absolutely. There are positive and negative years with S&P 500. Going back to 1926  the average rate of return was 10.4%. So, why don't we just use the S&P? It's broadly diversified, it's the one that has the most history for having good data that goes back that far. It's 500 of the biggest publicly traded companies, at least in the U.S. with an average rate of return of 10.4%. There were more positive years than negative years. Doesn't mean there weren't a lot of negative years. Over 99 years, 73 of them were up, 26 of them were down. And so to get that 10.4% rate of return, you would have had to suffer sometimes, right? It does not feel good to any of us to see our asset values drop. But that's the way you would have gotten that return, by suffering through those down years. 

The good news is that there are more up years, more up to the average rate of return from the 73 that were positive. Those were 21.5%. And the average negative year was down 13.4%. Here today, we're sitting at about a -14% for the S&P 500, which is just about the average of those negative down years, and that’s if this even ends up being a negative year. Our case is still not that we're going to see a down year. There's very likely going to be a bounce-back here at some point, even though we might have some further down to go before things bottom out and bounce again. The market hates uncertainty and there's plenty of it right now.

Jeremy: Absolutely. Any one year can do its thing up or down with wild swings and whatnot. But again maintaining that long term focus and maintaining the fact that yes you have a plan, and it’s a good plan. The bad years do get factored into the plan, which is why we use some conservative estimates on a lot of this stuff. That being said, when we get up into those 90 percent probability of positive returns, it's a pretty nice thing.

Josh: Yeah, figuring the odds, the odds don't really tell you anything about what's happening at any given moment. For a given day, it's a coin flip. On any given day, it's about a 50/50 chance that you'll be up or down. Not great  for a day trader. Their odds aren't good. But over a month, there’s a 62% chance that you’ll be positive and then you give it a year, you’re up 77.4%. Not guaranteed by any means. None of these numbers are, but over a five-year period, there’s a 93% chance that you'll be up. Over a 10-year period, a 97.4% chance that you'll be up. I think there's only been once or twice in any 10-year period that somebody would have been negative. So maybe this will be the exception to the case, right? Yeah, probably not. 

Volatility works both ways. We've certainly seen that the last couple of weeks or so. In an average year looking at the last 20 years or so, there's about a 65-day average as far as 1% up or down on any given day. So in other words, volatility is a normal thing and a normal experience as an investor. There are certain years like in 2022 we saw an up or down of more than 1% 122 days of that year. And in 2017, there were only 8 days. It was very steady. That's pretty rare.

Jeremy: And a lot of the high ones are associated with turbulent times or down markets

Josh:  It's kind of like turbulence on planes. I mean, 100% of the flights I've been on have had turbulence at some point. But the plane still landed. This financial turbulence we’re in right now with the 2025 tariffs could blow over. Maybe not. We might look back at this year as being a really rough year. But looking at the 15 worst days of the last 30 years or so, the worst single day was Black Monday, back in October of 1987, right? Market was down 20% in one day. That was pretty bloody. But even in that, even the worst day that we've ever had in the stock market, a year later was up 23%. Look at 2020. During the pandemic we had a couple of days where we were down 12%, one day, 10% one day, then up 66% a year later, up 59% a year later. Over the last few decades, there's only been one time that you would have been negative during the next 12 months and that was back in the financial crisis of 2008. Again, it doesn't guarantee anything, right? We could be negative a year from right now but on average, what we're really looking at is how to be a successful investor; what are the odds; what are time-tested principles to follow.

Looking back to 1942, where good data is available the S&P 500 and the Dow corrects out every 16 to 17 months where there is a correction drop of 10% or more. And a 15% or more drop happens about every three years historically. At 20% or more we get a bear market, and that’s about every 5 1/2 years or so. All these cycles are on average, which doesn't mean you won't have a couple of them back-to-back like we saw in 2020 and 20 22. But historically in general, that's how often these do come around. So as unique as this might seem, and as uncomfortable as it is to see the market gyrate like we are now, it's certainly not unique, at least from a historical perspective. We want to put some perspective on this because when you're in the middle of a storm or an earthquake, it's easy to lose perspective very quickly and get too focused in on the news of the day. 

Jeremy: Absolutely. So let's take some questions. We’ve consolidated a lot of these, so you might not hear your specific question but I think we'll get everything covered here. First question is regarding bonds or other less vulnerable instruments: Is now a good time to go into those? What benefits do they give you, and what's the cost associated with them?

Josh: Bonds are sometimes called fixed. Fixed income is the jargon we use in our industry as a fancier word for bonds. You know, bonds are a guaranteed investment, but it depends on a lot of things, and that guarantee is just as good as who's doing the guaranteeing. Is it a federal government fund? Is it a corporate buyer that's guaranteed by Microsoft or something like that? Also keep in mind that that bond has a maturity date and that maturity could be 20 years out, 30 years out, depending on what kind of a bond that you own.

That price can fluctuate because your promise of the money back doesn't come until 10 years, 20 years, 30 years, whenever the bond matures. So recognize that even the bond market can see swings and even the bond market can see negative years, even though those guarantees are still there on the underlying securities. That doesn't mean the prices won't change in the meantime. Historically, the rate of return on bonds is a heck of a lot lower. Bonds are probably part of your diversified portfolio, especially if you're retired and having some fixed income. But recognize that the more fixed income we put into a portfolio over time, the rate of return you're going to be getting is lower, which means the end result is lower. You don't have as much money to spend, so keep that in mind. Doesn't mean you shouldn't make an adjustment to your risk number or your profile, but just recognize that there's a price to pay for that too.

Jeremy: Yeah, absolutely. And depending on what your risk level is right now, typically bonds or bond funds of some kind are a part of your portfolio. At this point it’s like the ballast to the ship.

Josh: Yeah. And there's no guarantee to that. In 2022, even among diversified investors, the bond market went down and the stock market went down. They both went down that year because the Fed was raising interest rates aggressively and it caused bond prices to go down temporarily. There was some bounce back in future years. But in 2022, being a diversified investor unfortunately didn't help a whole lot. 

Jeremy: Absolutely. Next question that we have is this: You’re typically told to not overreact to short term fluctuations. What is the trigger point to a major change?

Josh: All the stuff we just looked at doesn't support a major change as far as timing. No one knows what the market will do and how to time it. But if something fundamentally has changed in your life, that's usually the trigger for when or why we would make a huge move. 

Let’s say that you know your risk number and it’s always been 70. You got through the pandemic and 2022 and all kinds of markets. But now you're wondering, gosh, maybe something's changed here; maybe your overall temperament has changed. Maybe your overall situation or even time frame has changed or maybe there's a chunk of money you weren't planning, but hey, you need $50,000 now. 

You might want to think about that, right? Based on the data we saw before, the odds aren't exactly good. Certainly things can get worse. What’s happening now doesn't mean that there won't be further downs or surprises or hits to earnings or economic growth based off the tariffs. So a lot of it's just your life circumstances. And if you’re in extreme anxiety; if you're losing sleep at night, it's probably something to at least talk to us about. If you just can't take the uncertainty anymore, that doesn't mean it won't be a bad investment decision to make a change, but if it helps you sleep at night, you may have to do it.

Jeremy: Absolutely. So next question: It's hard to know if this tariff trade war is a game of chicken or a long term strategy. How do we ride this out without preparing for a recession?

Josh: Well, most economists think we're already in recession at this point. In fact, it would be surprising if we're not. So, whatever you think about tariffs, I'm sure you don't like them from your portfolio standpoint right now. Tariffs are certainly likely to cause inflation. They're certainly going to have a massive impact on trade policy. Very disruptive, and that's why the market doesn't like it. So we're probably already there. I's just a matter of whether it’s a mild recession or a really bad recession. How long is it going to last? And that's unknowable right now. As far as it being a game of chicken or a long term strategy, it's both.

Jeremy: There's definitely some posturing.

Josh: Yeah. Do you see the news every day? I mean, it's clearly a game of chicken, but also, this isn't just going away. Clearly, people were thinking maybe it's a game of chicken back in January and February. But it’s clear that the administration is very committed to a longer term strategy of tariffs. So, not something that's going away. Prepare for it. Revisit your plan and revisit your time frame. Certainly, we'll be making adjustments along the way as far as rebalancing, but no matter how bad it gets, there still is a right and a wrong way to react to it. Market timing or making a huge move probably would not be in your best interest.

Jeremy: And I'll just follow up by saying for any of our clients that work with us, depending on how long you’ve been with us, we've been working a good amount of time to develop a long-term plan. We’re not going to throw the baby out with the bath water, and the reason we trust in that plan is because we have a solid, time-tested process that we follow. Obviously we're doing a lot of rebalancing with pockets of opportunity that pop up in times like this. We take advantage of those when they come along and it's not usually something really flashy; it's small shifts between sectors here and there. 

That leads us into our next question: With everything happening right now, trade war, inflation concerns, decrease in government subsidies, etcetera, are there any sectors we should be avoiding or buying and how does Keystone protect our portfolios?

Josh: We talked about this in our forecast. There was a concern at the time and we didn't yet know why. I mean, the MAG 7, which are 7 big tech companies, had been getting a lot of return out of the market the last few years, to the point that they were probably overvalued. Now we know they were overvalued, because those have taken a huge hit. So,  you’d really feel it if your portfolio is over concentrated—which it would not have been if it was with us, because we would not have stuck all your money in Apple or Google or something like that. Those companies are a lot more extreme as far as losses. Doesn't mean those companies are going away. It's just that they were overvalued at the time. So, you know, not making a big bet right now, sustained broad diversification, even though that seems really boring, is the right way to go. Clearly in the near term, the market does not like tech stocks because they were overvalued before. The wise thing would be to rebalance. When you get one sector that's becoming an outsized part of the portfolio, we'll gradually trim that money off and put it into other sectors. Same thing in the opposite though: If you see tech stocks drop say 30, 40, 50%, as we saw in the dotcom crash in the early 2000s, continuing to rebalance means you're buying those stocks, hopefully at a lot cheaper price. And people that are rebalancing tend to get better rates of return over time than people who have a static portfolio or are overly concentrated  in one area.

Jeremy: Yep. So this question kind of goes back to the bonds question: What are the available options or strategies to protect portfolio value or take advantage of things in the market for more stable returns?

Josh: Yeah, again, that would mean a diversified portfolio. And it’s going to be important to have a risk number that you can live with no matter what the market's doing. In other words. If your risk number is zero, you probably just have all your money savings in cash in the bank, and that might be the best option for you if you're not willing to take any investment risk or have any uncertainty. It's important you know what a bad year looks like, and that's why we spend a lot of time with folks upfront to understand not only what rate of return potential this portfolio has over time but also what does a bad year look like even in a conservative portfolio. 

If you want something that's 100% protected, then it's subject to inflation risk, right? Or you put too much in one bank and lose money because the bank goes broke or something like that. There are always risks. It's just a matter of what risks you are you willing to take. Except that, keeping a higher level of cash might be appropriate. We always recommend at least three to six months’ worth of living expenses, sometimes 12 depending on your situation and maybe that's how you deal with things.

This turbulence could last a while. So do whatever you need to do. Maybe you're raising the number of months’ of living expenses you’re keeping in cash. That buys you time, but allows you to still stay in the game and not be subject to the risk of making a bad move where you end up being out when the market eventually bounces back upward.

Jeremy: Yeah. So it's really all about that risk tolerance. A role that a good financial planner can serve, right, is being that voice of reason and talking you through any concern. Asking what are your needs; how much cash do you need to get you through the next year? How do we come up with that so that the rest of this stuff can make a comeback. 

Here's another good question: What metric would you use to determine whether there are real risks of a severe financial stress problem? At what point do we make a major decision in our investment mix versus waiting until it's too late?

Josh: A couple of things there. Number one, it sounds like part of it could be a question about just personal circumstances as far as when somebody needs the money. And sometimes that changes. For example, somebody might have had a certain spending level and now all of a sudden their health has failed and it looks like now they're gonna have to pay for long-term care. In that case, what used to be a fairly modest withdrawal each month is going to go up a whole bunch. That 5-year  or 10-year or 20-year time frame could be used up in five years. Well that's a lot uglier because it's so important to control your withdrawal rate, because the only people that get hurt during bear markets are the people who are forced to sell, and in that situation you're being forced to sell at low prices. 

If this market turns a lot lower, that problem gets more severe. That’s why as an industry we recommend a 4 to 5% withdrawal rate per year. That means we're just selling small pieces of the portfolio. If we see a pullback in the market, say things are down like in the financial crisis, maybe things go down 50%, which we don't think is going to happen but that doesn't mean it won't. When it’s down 50%, it looks a lot uglier, right, to somebody who might have been taking out 3%, or 4 or 5% each year. Now  that number is just blown into the stratosphere. So it's prudent to pull back on spending until this settles out. We want to reduce the amount taken out of investments. Some clients even stop the withdrawals and live off cash reserves for a while. Anyway, I think it goes back to the risk number again. It's looking at what a really bad year is like and asking what you can live with as an investor. 

In 100% stock portfolios, there have been several times over the last 100 years or so when the market went down a lot very quickly. Most people, especially if they're retired, are not going to be comfortable with that. And so we started introducing fixed income and other stuff that brings that risk number down. 

Jeremy: So obviously if you've worked with either Josh or myself, you've heard that 4% rule, right? So what does that mean in periods like now? To give you some round numbers to think about that: If, say, your portfolio is $1,000,000, a 4% distribution on that is $40,000 a year or roughly about $3300 a month, right? Now, if there’s a 20% drop in the market, your $1,000,000 portfolio is actually worth about $800,000. That also means that 4% is no longer $40,000, but $32,000, which drops that monthly from $3300 to about $2700, roughly. During a 30% drop, instead of a $1,000,000 portfolio, now you have a $700,000 portfolio which drops to about $2300 per month. So, especially for retired individuals who are living on this portfolio, if we want to try our best to stay within that 4% rule, it might make sense to pull back on what you are pulling out because to reach the same income level you were at before at 4%, now you're pulling 6% or 7%. So these are definitely things to be considering as far as weathering this storm. Ask, what if it gets worse? What are the things that we can actively do right now? And withdrawal rate is a big one.

Josh: Yeah, so with withdrawal rate, that's a trade-off. Nobody likes it. It could be that you've gotta put off a major purchase or home improvements or something like that. It might even be getting really uncomfortable. Instead of going out to eat a bunch or doing DoorDash, we're gonna eat more home cooked meals. And in some circumstances people make big changes to get their spending under control. That doesn't matter as much if it's short-lived turbulence, right? If this ends up being a short period of volatility versus turning into something much worse. Maybe it turns into an 18 month deal instead of a couple of months deal. The duration matters a lot as well.

Jeremy: And of course, when we're in this, it feels kind of weird. We had one client say, “Hey, it feels like the rules of the market have changed. Usually I'd buy in and buy the dip, et cetera.”  It’s tied to individual risk tolerance. The portfolio spending rate and draw rates should be making the decisions driving changes that we're making at this time.

Josh: Yeah, I wouldn't make any rash moves if you have cash on hand right now. We go back and look at the numbers before we know if it's a long term investment. If you're not going to be touching it for a long time, maybe. It could also be a dollar cost average which just means that we do it in chunks, in some kind of disciplined manner. Maybe it goes in for a 3-month period of time or 6-month period of time, which means that if things get worse and the market goes a bunch lower, well, we got some of those average prices as they went down. And if you did it over that period of time, the market could have bounced back a bunch too. So again, unknowable. But that is one way to smooth out that risk.

Jeremy: Here's another good question. Do you know what's the risk of stagflation coming to fruition?

Josh: I think medium to high risk, but who knows how long that would last. I think it's pretty likely if you just look at tariffs. Whether you like them or not, tariffs are attacks. So that could have an impact on the economy. Certainly, it can have an effect on people spending. It can be inflationary. Which means that the Fed may not have as much power to lower interest rates. You could end up with a period where interest rates are going up, which means that now we have stagflation, meaning high inflation and the economy is not doing great. I think in the long term, probably not. But in the medium term, I think there's a fairly significant risk of that and it's not like the market doesn't already know that, right? That's why you're seeing things priced as they are. 

All the things we're talking about right now, we have no secret information on why the market is gyrating right now. We’re trying to take into account what's going to be happening over the next 12 to 18 to 24 months in the economy. The market’s trying to figure it out, which is why the gyrations. We don't want to sugar coat it. We could be in a period of not the best of times, at least in the short term.

Jeremy: Next question: Out of curiosity, do we ever make a move to start drawing monthly funds from different places such as bonds versus stocks?

Josh:  Yeah, absolutely. Let's say we saw a really severe downturn and it lasted for a while, like the financial crisis of 2008. That was the last time we saw a really big drop that lasted a long time. At the time, for clients that were retired and pulling money out, there were a number of clients for whom we just stopped selling stocks for the monthly distributions. In other words, we worked with carving off some treasury funds and cash and things like that. They had enough to fund a long enough period of time so that we were basically drawing down on that until things bounced back. Eventually they did bounce back. So that was the last time that we made a big move like that. Because it lasted a long time, it was an extreme. So it's not something that that we want to necessarily do on an immediate level, right? But if this turns into something much more severe, then we may want to look at that.

It would be done on an individual basis for clients. So, why wouldn't we do that right now? Well, looking at the financial crisis again, things got a lot worse over an 18-month period. So you could have gone through all of somebody's fixed income and cash over the course of that period—and then at the bottom be forced to sell stock after the market’s down 50%. So, because we don't know the duration, disciplined rebalancing along the way continues to keep your risk number in check. 

Jeremy: Absolutely. So this question is one we kind of already answered. With uncertainty in the markets, should we be withdrawing cash from our banks as a precaution? Will any of this turmoil cause any issues with the credit union losing cash, things of that nature.

Josh: It's an individual choice again, but from my last comment, be aware that you could blow through all your cash and then see asset prices lower. So I would never go less than three to six months’ worth of living expenses and cash. Always keep at least that in in the bank. I don't know if this is the time to blow through all that cash. We've had some clients that had a lot more than a year’s worth of cash and they have us turn off their withdrawals. They reduce spending for a few months and see how things shake out. So obviously it's a dynamic situation. We're keeping in touch with them as far as any financial institutions are concerned. 

In 2022 Silicon Valley Bank and Signature Bank failed. There was a huge fear across the economy when these huge banks had to get bailed out. Some of them didn't have to get bailed out. The government stepped in and so forth. So I don't know of any depositors that lost money, but I think the concern of the question is about how much money should we be keeping in any one bank. So the limit is $250,000 for FDIC , or NCAA if you're at a credit union. And I don’t know of anyone who lost money from having it on deposit in those now-defunct banks, but that was because the government stepped in to shore up the institution of the FDIC, which meant not necessarily keeping the limit of $250,000 because they didn’t want depositors to lose money. But that was a real risk back in 2022, or at least a fear.

Jeremy: Absolutely. And here's a question regarding required minimum distributions, asking about the timing. Is it better to take it now? Should I wait for the market to jump back? 

So, quick thing on RMD's, basically how they calculate a required minimum distribution is they take the December 31 balance of that account from the prior year and then pull it into their formula based on your age and that's how much you have to take out. You have the entire year to take that out. Timing wise, again, we're not huge fans of trying to time the market. The basic rule is just that it has to be out by December of that year. So keep an eye on your cash needs. Gear things toward whether you have any big expenses coming up. Obviously, we're going to make sure that you satisfy the RMD, because you don't want to have to pay the penalty. But there's also not a major rush or push.

Josh: Yeah, you could do it in chunks, too. A third of it right now, wait a few months, take out a third. Or if the market comes rocketing back at some point, then take the rest of it. 

Jeremy: This next question is specific to employee stock shares. So, clients who have employee stock shares have been wanting to liquidate. When you have stock shares, you get restricted stock or options from your company that are going to grow to be a pretty big part of your portfolio. The question is mostly around what's a good time for this; is now a good time to sell to minimize your exposure to that, or do we wait for the market to jump back, and what does that look like?

Josh: That's a good question. It depends, right? We've got clients at Apple and Google and Broadcom and all kinds of mostly tech companies, and many of them are getting restricted stock units or stock options. So I'd say a lot of it depends on if you are still employed with that company. Are they still giving you more? Are you still having additional each quarter? Because if that's the case then your problem may be a good problem, right? I mean your problem is compounding over time. So to come up with a disciplined strategy means taking the emotions out of it. You can divest over a period of time. And things can always get worse, right? I mean, we've seen stocks go to zero

for once-great companies. So, look at the individual circumstance, but be open to starting to sell, starting to get out, but maybe not all at once. Maybe a quarterly sell or something that's a non-emotional way to do it.

Jeremy: Absolutely right. Yeah. And then the only other thing I'd add is that it's an industry recommendation to never have more than 10% of your total portfolio or value in any one company. So that should factor into it as well. 

And now, coming to these next questions, I've been trying not to crack up because you guys have been killing me with some of this in the chat. We've been getting some real time market updates on these, and there's been some news. There’s now a pause on reciprocal tariffs for 90 days, and the markets had a nice little bounce up since then. Now, the first couple questions here are about exposure to the current environment. So, foreign investments companies specifically involved with tariffs versus what the current administration is doing towards future prospects of infrastructure here in our country. What is our client exposure to those particular things?

Josh: Well, in a typical client portfolio, we would tend to have maybe 10 to 20% of a portfolio in foreign stocks as a category. Again, we're always looking at staying away from being overly concentrated in any one company or sector or industry. That being said, tariffs are going to affect everybody, right? It's not like you can just isolate it to certain companies or countries. Everybody and I mean everybody will be affected. I've talked to small business owners too in the last few weeks about tariffs, just because everything is so interrelated. And I think that's what's causing so much upset is that the rules of the game, rules that have been fairly consistent for quite some time, have all been put into question right now. Today just now, we hear that there’s a 90-day pause. But still, any kind of business owner has to go back and say, “Well, this was my business plan for the year; how do I execute?” That’s the case whether you're Apple or any other company. “How do I execute in this environment with this much uncertainty?” I think diversification is the answer, which I know is a boring answer, but please don't put your neck out and try to make a big bet where you're trying to pull out of certain areas or trying to do better in a certain area.

Jeremy: And to piggyback on that, we maintain very well-diversified portfolios and so your exposure to any one market or sector should be fairly limited. For example, on the Mag 7 companies, we're never going to say, “Hey, there's a lot of opportunity in these seven companies. Let's buy these seven specific companies only.” We also don't do that with any specific sector. That disciplined approach to investing is not flashy in that you own a little bit of everything. So, as a client you might have exposure to one sector, but it's not enough to send your whole portfolio into a death spiral or anything.

Next question: Putting politics aside, what’s a reasonable approach to preparing for stagflation for someone approaching retirement? 

Josh: The boring answer is stay diversified and stay disciplined. But I mean if you're going into a period of higher inflation, that's something you might be adjusting your financial plan for. Historically, we use about a 3 1/2% inflation rate for retirement planning. We might bump that up. If  we bumped it up to four or five, we’d look at whether your financial plan can withstand that. That could drive some different decisions as far as when you retire and how much you can spend in retirement. So these are not anything we can control directly. Who knows? There's so much uncertainty. And a couple of clients that do a lot of supply chain stuff have pointed out that if you're gonna build a new factory, it's probably four or five years out, whether it's a robotic factory or there are a lot of people or whatever. Which means a new president, and who knows what Congress will look like at that time. So even though it’s in question, I'm sure it will bounce back and forth. But again, staying diversified will help, I think, to protect you. 

Jeremy: Yeah, absolutely. Next questions: Regardless of what side of the aisle you sit on with politics, what is the value of having a trade war? And if the overall idea is to bring manufacturing back to the United States, how is that going to impact things? What's gonna be different? 

Josh: Some of it's long term and that's probably above my pay grade too, as far as trade policy and everything. But tariffs are a tax. So as far as how they affect everybody, they probably will, right? And it'll probably affect consumer spending. We talked with a client last week that works for a big Tech company. It was in their financial plan to buy a new car this year and they’re not going to do that now. Instead, going to fix the vehicle they now have. You do that enough times, with somebody cancelling a vacation, somebody trimming their Amazon budget by 20%, etc., do that enough and it’s going to affect the economy, which is 70% made of consumer spending. So yeah, whether this trade policy and tariffs works or not, and whether you’re for it or not, it’s likely there will be a period of disruption and that the global economy is not going to react well to it all. So it's just a matter of the severity and the duration of that disruption.

Jeremy: I'd second that as well. There are going to be some pain points and I think even the current administration has come out and said that it's going to hurt. We just have to work within the current environment, right? There's probably going to be some negative to it, but can there be some positive as well? I think absolutely, it's just one of those things economically. If we look at any of the history of how this plays out, it's going to take some time. If manufacturing does end up coming back to the United States and we start becoming a producer of items and assets, what does that look like? That's an entire thing in and of itself. You never know. So, good and bad. We'll have to wait and see.

Josh: Yeah. A question about Social Security benefits that I got from another client who said, “I'm 66 years old and I was thinking about waiting until 70 until I got my Social Security benefit. But if the market goes way down for a while, should I consider taking Social Security benefits early,  so I won't have to take as much money out of my investments?” 

Some people do that. Back in the financial crisis, for sure there were people that started drawing Social Security early because they said it was not a good time to have to sell stuff. So that could be a case where maybe all of our analysis about when to start Social Security as far as longevity, could get pushed aside, and you might make the decision to start drawing it a bit earlier.

Jeremy: And if you're thinking about this and you want to see the direct impact on your Social Security, that's pretty specific to every single individual. So if you are considering this and you want to see the quantitative data behind it, let us know. We can run those numbers for you and you can see if it makes sense for you or not. Because that's going to be based on your individual situation.

Josh: A lot is coming in about real time news updates while we’re talking. Thank you guys, for the updates on the 90-day pause and markets jumping up for the day that are happening now.

Jeremy: We'll see where it ends up for the day, but does it address the tariff situation? Not really. This is part of the posturing thing, and so we'll see where it heads out. And here’s a good question: How quickly can my portfolio investment strategy be changed?” If someone does say that their risk level has changed, how quickly can that strategy be implemented?

Well, for that, give us a phone call. We can talk about what that new risk is, but as long as the market is open, we can change strategies on your account and place trades.

Josh: And make sure it's a well-thought decision and that emotions aren't too tied into it because you'll get whipsawed, right? I've seen that happen over the years. Sometimes people will get whipsawed when something's going on and they want to go lower risk and then things settle down. So now maybe, they want to get back in. That's the temptation, but the average investor does very poorly, as we talked about with the Fidelity study before. The average investor does poorly because they get sucked into reacting to turbulence. It's tempting to say, “I wanna pile on a bunch of risk,” when you're in a bull market and then, “I wanna pull out,” in a bear market. But now you're breaking the cardinal rule of investing. You wanna buy low and sell high. But if you let your emotions dictate your actions, sometimes you're doing exactly the opposite. It’s your money, obviously your decisions, but we just want to make sure that we're a buffer to that you're not falling victim to that.

Jeremy: Yeah. So, coming down to our last few questions here: Are there any investments in our portfolios we should get out of right away or move that you see as immediate red flags?

Josh: I would say if you're overly concentrated in something, maybe you have a huge amount of your investments in Apple stock or you have it all in the mag 7 or something like that and now you’ve taken a huge hit. And you say, maybe I made a mistake right before and I need to get more diversified now. I think that's probably the thing that would stand out to me. 

Jeremy: And then of course, I love this question every time it comes in: Is now the right time to double down on the market if we have liquid cash? Is everything on sale right now? Well, it was, up until the last hour or so before we started this talk.

Josh: Even without the rebalance that we're seeing in the market right at this moment, I think it's important to be disciplined and to not fall into that trap. I mean, this could be what they call a dead cat, where the market goes up a bunch after it's gone down a bunch, but then drops a whole bunch again. So I think if somebody had a chunk of cash right now, you really have to think about your true time horizon. Maybe don't go all in, right, maybe do dollar cost averaging to do it over time as opposed to all at once. 

Jeremy: I love that the dollar cost averaging is such a great tool. You do it in your 401K's all the time when you're paying into those. But is the market on sale right now? Well, yes, obviously it's down from its highs. Does that mean it's not going to go any lower? Not at all. It can definitely go lower. But is there ever a great point to throw everything you have into the market? On the long term horizon, it really depends on whether you can leave this money alone or if you might need it in a year or two. A lot of factors play into that. But I think the short and sweet and safe answer is, you can buy at any time, and things are not at their highs right now. 

Josh: We're always available to take questions. An easy way to contact us is to email communications@keystonefinancial.com We appreciate your business and your support over the years. It's during times like this that trust is built up.  You've got a team at Keystone instead of just one person. We've got a lot of history and a lot of bad markets behind us. And we got through all of them. But there are more corrections to come and more bear markets even if this one settles down. 

Jeremy: Thank you all very much. You can get hold of Josh by emailing josh@keystonefinancial.com or me, Jeremy, at jeremy@keystonefinancial.com . And we are always here.

Josh: Thank you and have great week.

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The Wiser Financial Advisor show with host Josh Nelson offers general information only and is not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your own accountant, financial or tax advisor prior to investing. Investment Advisory services offered through Keystone Financial Services, an SEC registered investment advisor.