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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and the world is feeling extra heavy at the moment. In addition to events overseas, I've had a few unfortunate events in my personal life that have just put me in a bit of a funk these last couple of weeks. Nothing catastrophic, just typical life stuff, but nonetheless, just been in a bit of a funk these last couple of weeks. So today, I want to lighten the mood and have a little fun for myself and for anyone else who's feeling some extra heaviness right now.
To do that, I'm sharing nine surprising little known facts about the economy, the markets and retirement planning. Longtime listeners might remember that I published a similar episode a couple of years ago, which I'll link to in today's show notes if you missed it or you want to listen again. And there are two stats from that episode that I find myself continuing to revisit and share with people.
The first is from Morgan Housel, author of The Psychology of Money, and he shares that for the last 100 years, the U.S. stock market has declined at least 10% once every 11 months. In other words, he emphasizes if a so-called market expert appears on the news predicting an upcoming 10% decline in the stock market...
They should really just say, everything's going to be normal. And this upcoming correction that I'm predicting happens on average every 11 months.
My second favorite stat from that episode was from the legendary Peter Lynch, manager of Fidelity's Magellan Fund, which averaged a 29.2% annual return during his 13-year tenure, double that of the S&P 500 during that same time period. And while that's a crazy fact on its own, in one of Peter's books, he shared that starting in 1965, if you invested the same dollar amount at the
peak of the US stock market every single year until 1995, so a 30-year time period, your average annual rate of return would have been 10.6%. So you invested the same dollar amount at the peak of the US stock market every single year for 30 years, your average annual rate of return would have been 10.6%.
However, if you timed the market perfectly, you had a crystal ball and you timed the market perfectly and instead invested the same amount of money at the low point of each year for those same 30 years, your average annual return would have been 11.7%. And if you kept things really simple and you just invested on the first day of each year for those 30 years, your return would have been 11%.
In other words, the difference between perfect timing and lousy timing was only 1.1%. As Peter put it, people spend an unbelievable amount of time and mental energy trying to pick what the market's going to do, what time of the year to buy it. It's just not worth it.
As I and many others have shared before, time in the market means more than timing the market. And with the current state of the markets and economic landscape, I think Peter's stat here is a particularly good one to hang on to right now. While many of our listeners are close to retirement or in retirement, this adage of time in the market still applies.
a long-term investment plan that spans multiple decades is still required to maintain purchasing power and create sustainable income. Okay, let's jump into today's nine facts. To grab the links and resources backing up the statistics that I'm sharing today, just head over to youstaywealthy.com forward slash 202. ♪
While most of today's facts and statistics are timeless, the first one to share with you today is specific to the current state of the markets here in 2023. And that is that year to date through October 13th, 2023, the S&P 500 has had a positive total return of about 14%. Despite all the crazy headlines, inflation, 8% mortgage rates, overseas war, a looming recession, the US stock market is up double digits.
However, what isn't so obvious is that the seven largest stocks in the S&P 500, sometimes these are referred to as the Magnificent Seven, these seven stocks are responsible for just about all of the gains that we've seen this year in the U.S. stock market. You can probably guess those seven stocks, Apple, Microsoft, Amazon, Nvidia, Google, Facebook, and Tesla.
These seven magnificent stocks are up 90% year to date. That's nine zero 90%. Meanwhile, the S and P 400 and the S and P 600, two indexes that track mid and small companies and do not include those seven companies. These two indexes have returned 1.68% and negative 2.45% respectively. So far this year.
In other words, while the U.S. stock market on the surface seems to be producing healthy returns in 2023, looking under the hood tells a different story. Most U.S. stocks are relatively flat or even negative this year.
According to Lizanne Saunders, the chief investment strategist at Charles Schwab, it's typical that some of the larger cap companies are going to drive the performance in the United States. But it becomes a bigger risk when there's a dramatic underperformance by basically the rest of the index. The risk that she's referring to is that these seven stocks come back to reality and in turn bring the value of the entire S&P 500, the entire US stock market down with it.
But the bigger risk that I see is diversified investors getting lured out of their smart, diversified portfolios and chasing the returns of the U.S. stock market. It's not easy to watch a single asset class produce double digit returns while your boring, globally diversified portfolio of stocks and bonds lags behind it, especially when that single asset class is the U.S. stock market.
Knowing that these double digit returns are largely being driven by just seven companies, hopefully prevents investors from making emotional changes to their portfolio and prevents them from chasing trends and provides a better perspective of the current state of the stock market.
Okay. The second interesting fact to share with you today is about investing in cash, more specifically the risk of investing in cash. So get this from 1934 to 2002, a 68 year time period, one month treasury bills, i.e. cash produced negative real returns for 68 years. Cash produced a negative real return. Okay.
As a reminder, the real return of an investment is the rate of return after you account for inflation and real returns are important to monitor because the reason we invest our money in different asset classes is to preserve our purchasing power and outpace inflation for long periods of time.
But during this 68 year time period, almost seven decades, inflation outperformed cash. As Michael Batnick wisely put it, what's safe in the short term can be risky in the long run.
And this leads nicely to the third statistic to share with you, which is timely given today's environment. As most of you know, high yield savings accounts and money market funds are paying somewhere between four and 5% at the moment. It's all the rage right now. Consumers are finally excited to be earning a meaningful return on their cash.
But what if I told you that today's cash environment is not all that different than it was in 2019? Before COVID, before trillions of dollars were injected into the economy, before a surge in inflation, and before a rapid spike in interest rates.
I believe I've shared it before, but there's a great website out there, which I'll link to in the show notes that produces dozens of real time interactive historical charts, with one of them being the long term real returns of one year treasury bonds. So today, a one year treasury bond pays about 5.4%, a similar rate to the money market funds that investors are using right now to park their cash.
As the chart illustrates, if we account for the current inflation rate of 3.7%, the real return on our safe one-year treasury bond is 1.7%. Now, rewind back to January of 2019, and one-year treasury bonds were paying about 2.57%. Not too exciting.
However, inflation was also not very exciting, comfortably sitting around 1.52%. So after accounting for inflation, our real rate of return back in January of 2019 was just over 1%.
Not terribly different than today's environment. And to be clear, and to get ahead of emails correcting me, I realized that inflation didn't sit at 1.52% for all of 2019. It crept up slightly ending the year around 2.4%, but one year bond yields also increased and still produced a total positive real return for the year.
To summarize, while we of course want to optimize our cash and ensure that we're getting the highest rate of return that we can on our liquid savings, it's important to factor inflation into our calculations and not be fooled into thinking that 5% today is wildly different than 2% a few years ago. In fact, many investors would likely prefer to rewind back to low nominal rates and low inflation.
Okay, switching gears for a moment, this next statistic is about life expectancy, which we all know is an important assumption to take into consideration when making most retirement planning decisions. In fact, at my firm for life expectancy, we use age 100 when running all of our retirement planning projections and new clients will often push back telling us there's no way they'll live to age 100, that this assumption is not accurate.
We explain that we use age 100 to put extra pressure on the analysis to help account for the unknowns in life. But we also highlight that it's not terribly far off for many of our clients. And that's because according to multiple studies, individuals in the United States who are more highly educated live longer lives on average. Naturally, higher education typically leads to higher paying jobs, which affords the opportunity to pay for better food, housing, medical care, and so on.
So while life expectancy for the average 65-year-old female today is about 82, you, like many of our clients, may not be average. In fact, one study concluded that among women in the top 10th of earners, life expectancy rose by almost seven years.
Level of education and higher than average income and net worth coupled with being an active, non-smoking married person with healthy eating habits and parents with good longevity means that living well into your 90s is very possible. And while there's no crystal ball and life has plenty of curveballs to throw at us, my point in highlighting these statistics is that longevity risk is a real threat in retirement and it doesn't make its way into planning conversations as often as it probably should.
Speaking of risks and threats to our retirement, the fifth statistic to share with you today is about long-term care. Now, most retirement savers at some point have been told that 70% of people turning 65 today will need some form of long-term care services in their lifetime. And about 25% of those people will need that care for two years or more.
However, what often isn't shared is that only about 13% of people who are age 65 today will spend over $150,000 in their lifetime. Even crazier, roughly 63% of people age 65 today will have zero out-of-pocket long-term care expenses during their lifetime. The other 24% will fall somewhere in between.
And I share all this to point out that when you pull back the curtain, a relatively small percentage of the population is truly at risk for an extreme catastrophic long-term care event. Now, that doesn't mean you should just roll the dice and assume that because you're in good health, you should ignore this part of your retirement plan. Quite the opposite. Everyone needs to have a plan for a potential long-term care event. Right?
But not everyone needs to be spooked into buying long-term care insurance to protect against this catastrophic retirement plan destroying event.
Okay. Stat number six, Warren Buffett, chairman and CEO of Berkshire Hathaway, often referred to as one of the greatest investors of all time. And Berkshire stock often referred to as one of the top performing investments of all time. So get this in the 20 months leading up to the dot-com peak in the 1990s, Berkshire Hathaway stock lost 45% of its value. The
The NASDAQ, on the other hand, during those same 20 months gained 225%. Investing is hard. It requires conviction, patience, and discipline. Imagine watching your portfolio get cut in half while the rest of America is getting rich buying internet stocks on E-Trade.
But that discipline, the discipline to stay the course during a time period of significant underperformance is why to me, Warren Buffett has been one of the most successful investors in the world.
And another fun fact while we're talking about Warren Buffett, 99% of Warren Buffett's wealth was created after his 50th birthday. As the famous quote goes, it takes decades to become an overnight success. Speaking of overnight successes, Shark Tank, one of my favorite shows, just kicked off its 15th season and inspired the seventh stat that I want to share with you.
So as most know, billionaire Mark Cuban is one of the regular sharks on the show. He's also arguably the most famous shark. And as a result, he's invested $20 million in shark tank deals since the show began more than any other shark.
But just because he's successful, famous, rich, and has access to pretty much any investment deal he wants doesn't mean he's able to capture higher investment returns than you or me. In fact, last year, Mark Cuban publicly shared that he has not made a profit from his suite of Shark Tank investments, that he's taken a net loss so far on all the investments combined. Now,
Now, while there are still potential exits in some of his existing Shark Tank deals that could come to fruition in the future, I think Cuban's public remarks reinforce something that I've shared dozens of times here on the podcast. And that is that successful investing does not require early access to exciting startups or access to exotic investment managers or hedge funds that are offered to the ultra wealthy for
For the last 15 years, a boring, low-cost index fund investor outperformed one of the most famous investors on Shark Tank. Now, some startup investments do hit big, making up for all the other failed investments, which brings us to stat number eight. And this one is about a company that we're all very familiar with, and that is Coca-Cola. The Coca-Cola company, as it's formally referred to, went public in 1919 and was very much a startup at that time.
If an investor had some foresight and purchased one $40 share of Coca-Cola stock when it made its debut on the market and reinvested all of the dividends along the way today, that $40 investment would be worth over $10 million.
Similar to my comments about Warren Buffett, holding this stock through all the ups and downs would have been no easy feat. In fact, the stock experienced multiple drawdowns over 50% along the way, several drawdowns over 20%. Just like any other investment, the performance was far from being a straight line up and to the right. It was a rocky, challenging 103 years.
One of the most famous early 20th century Coca-Cola investors was a guy named Mark Monroe, and his conviction in the startup is said to be responsible for 67 of what they call Coca millionaires in the little town of Quincy, Florida, where Monroe worked as a banker. And it's been reported that many of the descendants of these early Quincy investors still hold on to these original shares today.
Lastly, our ninth and final stat today in John Dennis Brown's book, 101 years on wall street. He shares that in 1908, the earnings or profits of all the companies in the Dow Jones industrial average were cut in half. All the companies in the Dow Jones, their profits cut in half.
However, the index that year returned a positive 46%. In other words, the stock market is not the economy. In fact, according to a study done by the London Business School, which I'll link to in the show notes, there's only a slight positive correlation between GDP growth and stock market performance. And we've seen similar developments play out over the years between the stock market and the economy that aren't always isolated to GDP or company profits.
For example, in 1982, unemployment entered the year at 8.6% and finished close to 11%, its steepest level since the Great Depression. However, the S&P 500, the US stock market, returned 21.6% that year, double the long-term historical average. As one Morningstar article puts it, stocks anticipate future developments rather than dwell on current affairs.
Okay, that wraps up today's episode. I hope you enjoyed listening as much as I enjoyed taking my mind off of things, doing the research and putting it all together. Once again, to grab the links and resources that support all of the stats I shared with you today, just head over to youstaywealthy.com forward slash 202. Thank you as always for listening, and I will see you back here next week. 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.
