Shownotes Transcript
Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And in case you missed it, the NASDAQ is now down about 8% from its recent all-time highs. Here are just a few of the headlines that I've seen recently. Wall Street tumbles as tech stocks extend their slide. Dow drops 300 points. Tech stocks keep sinking. Tech stocks slipped as bond yields have spiked.
In response to these recent events and likely many of these headlines, one of our listeners, John H., emailed me worried about a repeat of the dot-com bubble in the late 90s and what to do if we were to see another bursting of the tech bubble. Well, I won't pretend to know what's around the corner, and you guys know I'm a strong believer in a buy-and-hold approach to investing, but his question actually brings to the surface an interesting and little-known historical stat about asset classes and the markets.
It also serves as a really good reminder to be sure that you are invested properly, which I briefly mentioned in last week's episode, because when not if we see a double digit percentage drop in our portfolios, we have to buckle down. We have to stay the course. And more importantly, we have to maintain control of our emotions.
Bear markets and catastrophic events are not the time to be making major changes to your portfolio. So whether we see a repeat of the dot-com crash or not, I urge you to use this time wisely to review your financial plan, review your investments, and be sure that those two things are working together, aligned, and moving in the same direction.
If they are, a bursting of the tech bubble or growth stock bubble or some other threat to the markets that's out of our control should mostly be irrelevant. And by irrelevant, I don't mean that you shouldn't pay attention or stay informed or that these things aren't important. I just mean that you shouldn't let these events that are outside of your control cause irrational changes to your portfolio if you have a sound plan and approach in place.
Back to John's question. One of the problems with following the financial media and more specifically paying attention to major stock market indexes is that you don't always get the whole story. For example, from January 1st, 2000 to December 31st, 2002, when the dot-com bubble finally burst, the S&P 500 was down 38%. So in two years time, $1 invested in the S&P 500 was now worth 62 cents.
As many of you might remember, every media outlet at the time was hyper-focused on the struggles that were the U.S. stock market. One of the headlines I dug up said, U.S. stock market in steep drop as worried investors flee.
What most people forgot or what most people were likely never informed of is that during that same time period from January 1st, 2000 to December 1st, 2002, small cap value stocks as measured by Dimensional's US small cap value index returned a positive 43% during that time period. So that same $1 invested in this particular asset class was now worth $1.42 instead of 62 cents.
But you wouldn't have known it by reading the headlines or watching the news at that time. You would have thought the market was in a free fall, that everything was collapsing. But what we sometimes forget is that the market is complex and one major index like the S&P 500 doesn't always tell the whole story. In fact, it usually doesn't. And contrary to what we might think, it's
actually possible for one asset class or one subset of stocks inside of an index to suffer catastrophic losses while another performs very well, which of course reinforces the importance of diversification. But more than that, it reinforces taking a smart, prudent approach to investing.
So going back to John's question and the concern about how technology and growth stocks are currently behaving, if you have a properly constructed portfolio that is, of course, aligned with your financial plan, well, a repeat of the dot-com crash in high-flying growth stocks should
shouldn't be a concern that's keeping you up at night. With a properly constructed portfolio, you would own US stocks and international stocks. You would also probably own AAA-rated bonds and tips. You would avoid concentration in a single sector or security. You would have asset classes that zig when others zag. And academic research would likely lead you to favor small-cap value stocks over growth stocks in your equity allocation, which
if history is any guide, could help cushion the blow of a complete meltdown in tech and or growth stocks. Again, now is a great time to ensure that you are invested prudently, that you have a properly constructed portfolio, a portfolio that's not necessarily immune to losses, but a portfolio that improves your risk-adjusted returns and puts you in the best position for investing in retirement success.
Speaking of building a properly constructed portfolio, another listener of ours, Glenda P., who was actually one of the Stay Wealthy sweatshirt giveaway winners, Glenda recently asked for some book recommendations to kick off the new year. And since we're talking about investing today, here are three of my favorite books on portfolio construction to consider adding to your list this year.
The first is The Investment Answer by Gordon Murray, which is a great introduction to what we call evidence-based investing and building an academically sound portfolio. So if you're ready to branch out from the plain vanilla S&P 500 indexing world in an effort to improve your future expected returns while also reducing risk in your portfolio, this book is a really great first read and it's a really quick short one.
Number two, the second book is called Unconventional Success by David Swenson, which is far from an easy read, but just one of the classics on portfolio construction for those that really want to dig into the nerdy details.
And then lastly, one that I don't think I've mentioned here on the show before called The Incredible Shrinking Alpha by Larry Swedrow and Andrew Birkin. The second edition was recently released and it's just full of tangible examples that show you how to apply a lot of these concepts in real life.
I'll definitely be doing another more in-depth series on retirement investment, investing in the coming months. I did one last year that was really, really popular. So I'll be doing another one of those in the coming months, especially since there have been some new developments in the investment product world. But
Next week, we're headed back into the planning world where I'm going to be kicking off a two-part series on life insurance for retirees and those nearing retirement. This topic has been widely requested by a lot of you, and I'm really excited about how this series is shaping up.
So thank you as always for listening, and I will see you back here next week to kick off that series. 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.