Who doesn't like a bull market? But when the bull is running hard, investors can become overconfident and ignore critical safeguards, as SMI's Mark Biller explained last week on radio's Faith & Finance program.
Mark and host Rob West also responded to listener questions.
To listen, use the play button below. Scroll down to view the transcript.
Faith & Finance airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(More radio appearances by members of the SMI team are posted on our Resources page.)
Transcript
Rob West:
When markets soar, investors face a subtle but dangerous temptation, trading wisdom for excitement. Today, Mark Biller joins us to unpack the dangers of investing with emotion instead of wisdom. This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (opening music ends)
Well, it's always a pleasure to have Mark Biller, my good friend and executive editor and senior portfolio manager at Sound Mind Investing, a long-time and proud underwriter of this program. Mark, great to have you back.
Mark Biller:
Thanks, Rob. Always a pleasure to be with you.
Rob West:
Let me mention, when Mark is here, it's a great time to call with your investing-related questions. So you can go ahead and call right now. We'll get you in the queue and get you on very soon. 800-525-7000.
Mark, the markets have, of course, made a strong comeback since spring, and many investors are feeling optimistic about the year ahead despite some of the challenges we've got around us. How would you describe the mood right now?
Mark Biller:
Yeah. Well, Rob, the investors' mood has definitely shifted from extreme fear back in April to extreme optimism today, and I'm sure we'll get into some of the reasons why. There are some really good reasons to be optimistic and bullish right now.
But when we see investor sentiment shifts so far to the optimism, bullish side, that is noteworthy because just like fear can often lead to bad decisions during bear markets, excessive optimism can also lead to bad decisions during bull markets. And the danger really is that people start to allow their emotions to override sound judgment and maybe their long-term investing plan.
Rob West:
Yeah, I'll second that. Now, you note in your article in the latest SMI newsletter — it's entitled Bull Market? Great! But Don’t Get Carried Away — you note that we've seen this before. What lessons, Mark, should we remember from the past here?
Mark Biller:
Yeah, well, investor sentiment does swing, and it often swings from extremes in one direction to extremes in the other direction. And probably the "poster child" for excessive optimism was the late 1990s during the dot-com bubble. The euphoria back then was really contagious. Of course, we know that eventually that bubble burst and wiped out huge amounts of wealth over the ensuing few years during that deep 2000 to 2002 bear market.
And the similarities are one reason why people are pointing to that period so much. We had a really hot new technology in that era, which of course was the internet, and that did fulfill its promise. It went on to change the world, but in spite of that, a lot of those early companies failed. And even the ones that survived, they lost 80 to 90% of their value over the next few years.
So investors that piled in and threw caution to the wind in the late nineties there, they did pay a steep price for that.
Rob West:
Yeah, there's no question about that. So then, how should we approach the current market optimism, and is there a healthy way to keep it in check here?
Mark Biller:
Yeah, there is. First off, it's worth pointing out that long-term optimism is normally rewarded. We've had wars, depressions, recessions, bear markets over the decades. In spite of that, stocks have trended upward for more than a century, but excessive short-term optimism can be dangerous because investors get overconfident. They assume that markets will keep rising without interruption, and that's just never been the case. Pullbacks and bear markets are inevitable.
Rob West:
Mark, as you said, since 2023 — October of that year, that's less than two years ago — the stock market is up 60% roughly, and that's like six years' worth of gains packed into two years, right?
Mark Biller:
That's exactly right. And that's one of the reasons why sentiment swings so wildly and consistently in markets, Rob. It's because we all have heard over and over how the stock market averages a gain of 9 to 10% per year. But the actual number of years where the stock market goes up, 9 to 10% is shockingly low. The actual path is big gains and occasional big losses.
And so you get these stretches, like you just mentioned, the last less than two years we're up 60%. Well, it's hard to blame investors for getting really excited when every day they're seeing their 401(k) balance or whatever go straight up and to the right.
And so people start — the danger there is they start getting overconfident, and it's human nature to just project what's been happening recently indefinitely off into the future. We do it during bull markets to the upside, we do it during bear markets to the downside. We get irrationally excited or irrationally fearful. And that's really our biggest mental challenge as investors is to keep that even keel.
Because the danger at this point and during the bull cycle is someone who has a perfectly rational long-term investing plan, maybe it's centered on index funds, the S&P 500, they're plowing money every pay period into their 401(k). But they're also out of the corner of their eye, or maybe their brother-in-law is chirping at 'em about how they've been making 50 to 100% in crypto or in aggressive AI tech stocks or whatever it is, and they start thinking, my returns look, even though they're really good, they look kind of pedestrian compared to what Joe in the next cubicle's been making.
And that's really the danger, Rob, is we get away from the sound long-term rational plan that's going to get us to our financial goals and is balancing aggressiveness with the need for safety and caution, and we throw that caution to the wind and start piling into the more aggressive, more dangerous and volatile investments.
So that's really the warning, and I hope we can strike that balance today because this article is not at all about saying, "Look out the stock market's about to go down. You need to sell, you need to go to cash." That is not the message at all. In fact, I look at things today and I think they look pretty good. We can get into some of those reasons.
The danger is we throw away the long-term plan, throw caution to the wind, and now we're getting more and more exposed to the riskiest parts of the market, and that's when people tend to get hurt. That's what happened in the late 90s. They threw away their discipline, piled into the hottest tech stocks that worked for a while, but then when those stocks crashed, even though there were other places to hide during that bear market, everybody who was overexposed to tech just got their head kind of handed to 'em.
Rob West:
Yeah, that's exactly right. It reminds me of that story of the investor. I'm sure you know the name — I can't remember — but he said he knew that the crash was coming in 1929 because the shoeshine boys started giving stock tips. Is that right?
Mark Biller:
That's right, yeah. Supposedly Joe Kennedy, JFK's father...
Rob West:
There you go.
Mark Biller:
...related that story. Yeah.
Rob West:
Well, maybe we're back there again. But I think that's well said. Mark Biller's here today. We're talking about overconfidence as it relates to investing, and perhaps this is the season where some of you listening today have kind of moved away from that long-term, prudent, rules-based investment strategy, trying to capture some of these market moves. And we just want to throw up the warning, the caution sign here if you're doing that.
We also want to take your phone calls today while Mark is with us. We've got a few lines open at 800-525-7000. Let's dive into a few of those today.
We'll begin with Dale and Oklahoma. Go ahead, sir.
Caller:
Yeah, I'm just a small-town country guy. Don't know a whole lot about the stocks and stuff like that. But [I] work a family business — nine or eight to five, make about 60, 65,000 a year, which years ago used to be pretty good. But you're living paycheck to paycheck these days.
Rob West:
Yes, sir.
Caller:
So I do side gigs here and there, and then also I raise cattle and stuff, and we usually will sell calves at the end of the year every year. And you try to put a little money back here or there to save it, but it ends up burning through your savings or your pocket or whatever these days just because everything's so expensive.
And the question I had was, is it worth trying to get into the market — or what are your recommendations of doing if you put back as small as like a thousand dollars or something like that — something just to last or try to build something for the future for me and my wife and something like that?
Rob West:
Absolutely. It's a great question. I want to get Mark's thoughts. Lemme just ask first though, in that small business that you're a part of, is there any kind of retirement plan that's been set up or a Simple IRA or something or are you on your own for that?
Caller:
Nope. On your own. It's a family-run thing. Family everything. And we don't do any 401(k)s or anything like that. So it's pretty much what you do is what you do.
Rob West:
Absolutely. Mark, you got to start somewhere. What would you advise Dale?
Mark Biller:
Yeah, well Dale, you're right on, and you've articulated really well. The challenge that so many people are facing these days, this last several years with inflation's been really tough just trying to make ends meet. But at some point you do need to try to take those steps to get some money put away, and I certainly applaud you for doing that.
Normally, the first place that we would look for folks to start making progress that way is to make sure they have a fully funded emergency fund so that as those shocks of life do come up, you're well prepared there.
Once that is funded, then the question that Rob just asked becomes really pertinent. If you have a company retirement plan, that's usually the best place to start. If you don't for self-employed type folks like yourself, then usually an IRA, and specifically a Roth IRA, is a great place to start putting money away.
And you can open those with a lot of different places. All the usual names you see on TV — Vanguard, Schwab, Fidelity — those are all good choices. But the Roth IRA is great because you do have the ability, if you get in a crisis, to pull your contributions out without taking a big tax hit. And those contributions can be put into a simple market index fund, really any investment that you choose, and they can grow so you're not having to pay taxes as long as those are left in the account until you take 'em out in retirement.
That's the quick overview of how we would suggest someone get started. If you have a 401(k), especially with a match, go there first. But if you don't, then in a situation like yours, Dale, look at a Roth IRA. It doesn't have to be fancy or complicated. And those how to invest those types of accounts are exactly what we spend all day every day at Sound Mind Investing discussing. So there are a lot of articles on our website that can help give you some direction as you get started.
Rob West:
And Dale, I'll just add to that. Become an SMI newsletter subscriber and they'll actually give you the actual mutual funds to buy. Thanks for calling.
We'll be right back.
Rob West:
Well, the market's been red hot as of late, and it's probably going to continue, especially if the Fed gets into an easing cycle. Mark, what was your take on the Fed's action yesterday?
Mark Biller:
Yeah, I agree with you, Rob. Typically, when the Federal Reserve is cutting interest rates, one of two things happens — and it is kind of a case of two very distinct paths. So, one situation where we've seen cutting cycles in the past is when the economy is in recession. And when the economy is in a recession and the Fed is trying to stimulate it back out of a recession, then that's the bad path. Okay? When we're in recession, those Fed rate cuts tend to not help investors and help markets because the overwhelming force are those recession forces.
So you can't just assume, "Okay, Fed rate cut, that means stocks are going to go up and all of that."
But history is also very clear that when the Fed starts cutting rates, when the economy is reasonably healthy, that can be like a turbo boost to asset prices. We've seen that many times in the past — '95, '98. There are a lot of examples of these cutting cycles when the economy arguably didn't really "need" lower interest rates, and that tends to be very bullish for stocks, and that's really one of the biggest reasons I'm coming on here today saying, "Yes, you have to be careful about becoming overconfident. No, don't let the exuberance of the market today shift your asset allocation and take you away from your long-term plan."
But at the same time, I'm also looking at this saying, "You know what? Economy looks healthy. We've just started a rate-cutting cycle. I mean, these are good conditions!" You could make a strong case that we're actually looking at Goldilocks conditions for the markets. So this is not a call to sell, to go to cash, to get conservative. We're just trying to keep people on point. Stay with your personalized long-term plan, even though markets have done so well lately.
Rob West:
All right, let's head to Alabama. Barbara, thanks for calling. How can we help?
Caller:
Good morning. Yes, I'm calling to ask a couple of questions. My husband and I are both retired. I'm 69, he's 70. We have been blessed with long careers — of 40 and 38 years — and good retirement packages. And we are about to talk — well, we spoke with a new financial person yesterday and they recommended we put maybe half of what we have in an annuity with a fixed rate.
And I don't know anything about annuities. I'm hoping you can help us figure that out.
Rob West:
Well, it's a great question. It sounds like you all have been diligent and living modestly, saving diligently, and I can understand you'd want to get this positioned well for the future to preserve it, grow it modestly, but also perhaps even convert it to an income stream, and using a professional advisor to do that is a great idea.
Basically, a fixed annuity is like a CD, but with an insurance company. You give them a lump sum, they guarantee a fixed interest rate for a set period of time. It might be 3, 5, 7, 10 years, something like that. And then at the end of the term, you can renew, withdraw, or move the money elsewhere.
There are pros and cons. Mark, you want to weigh in on the wisdom of putting 50% in this season of life into an annuity, and some things she might want to think about.
Mark Biller:
Yeah, sure. So Barbara, the main upside of using an annuity in the way that this planner suggested is that, in the right situation — and it does kind of sound like your situation — this could apply. You can lock in a fairly certain path, and if that path meets a person's financial goals and can take a lot of the risk and uncertainty out of the equation, that can be a really appealing thing because you're not really subject to the market risk very much with that type of approach. And so for a couple that has some good maybe pensions or some other income streams, you can kind of get a long way down the road towards locking in that future financial security.
The downsides with annuities is it can often be a fairly expensive way to get there. So the expenses tend to be high, the costs involved tend to be kind of high. And that doesn't mean that it's a bad choice, it's just something to be aware of, to really get clarity and ask probing questions about exactly what the costs are that are involved there.
And I do like that he's not suggesting you're putting all of [your retirement money] in — putting half in and then having half available to invest and maybe take advantage of a little bit better returns in the markets, not being limited to the safety of that safety product, the annuity.
But I guess the biggest thing, Barbara, that I would say is I would suggest that you talk to at least one or maybe two other planners and have them look at your situation, see what their recommendations are, and maybe ask them specifically about the option of doing this kind of 50/50 split with your nest egg, of putting that into an annuity, and just kind of get a second opinion.
Basically, it's a big decision once you're locked into that annuity, you're not going to want to get out of it. There are a lot of fees and surrender charges and things. So just make sure on the front end that you really like that option the best, and you're going to need to talk to some other people to get some other counsel. So that would be my recommendation.
Rob, any other thoughts?
Rob West:
Yeah, I think the only other thing is just — and I agree with everything, Mark has said — the company risk. [An annuity is] backed by an insurance company's claims-paying ability. And so I would just check their financial rating. The most well-known [rating company] is called A.M. Best, and you'd want to make sure [the insurance company is] at least "A' rated. But I think Mark's exactly right on.
The other question is, "What is the other 50% going to be invested in?" And perhaps Barbara, that second and third opinion Mark referred to, you could check with a Certified Kingdom Advisor there in Alabama. Just send to our website, FaithFi.com — that's FaithFi.com — click "Find a Professional right there at the top of the page, and you can connect with somebody locally.
Back with more questions after this.
Rob West:
Seems like just about every other day, the market's hitting new all-time highs. What do you do in this kind of environment when it comes to your investments? I'm Rob West.
Mark Biller is here today. He's executive editor and senior portfolio manager at Sound Mind Investing. Head to soundmindinvesting.org to check out the article we've been talking about today, Bull Market? Great! But Don't Get Carried Away.
Mark, you mentioned one of the big problems here — and by the way, if you're holding, we will get to these questions here in just a moment — but you mentioned one of the big challenges in an environment like this is overconfidence. Unpack what that looks like for investors.
Mark Biller:
Great. Great point, Rob. We want people to be confident investors. That's really what SMI is all about. But there's a big difference between confidence and overconfidence.
So what is that difference? Well, confidence comes from understanding the market, understanding the fundamentals, setting reasonable personal goals, investing according to your personal risk tolerance. Those are all things that will breed a confident investor.
Overconfidence takes all of that and then takes one more step, which is assuming that you know what the market is going to do next. And that's really what happens when we have two years of basically straight-up markets. People start thinking, "Well, that's what the market does." And the truth is nobody knows what the market's going to do next. When markets have been so strong lately, that's when overconfidence comes in and becomes a real danger.
Rob West:
Yeah. Let's head back to the phones. We're headed to Georgia next. Jeff, thanks for your patience. Go ahead.
Caller:
Good morning, Rob and Mark. How are y'all doing?
Rob West:
Great. Thanks for your call.
Caller:
Yes, sir. My situation is I just retired after 36 years with United Parcel Service, and my wife and I have been blessed to be debt-free. Our home is paid for, and we don't have any auto loans or anything. And my wife is still working. She's three years younger than me, she's 58.
But our 401(k) has a balance of about $592,000 in it. And I've pretty much managed by myself because of the limited choices in that 401(k). And I mean — a good bit of it is in the, quite a bit of it's in an S&P index, and part of it's in a Russell 2000 Fund, and then another balanced fund basically. But am I too aggressive at this point in my life? You think at 61 years old?
Rob West:
Yeah, good question. Mark?
Mark Biller:
It is a good question, Jeff. Probably the biggest determination of that would be how much you have in that balanced fund, because the S&P 500 fund, the Russell 2000 Fund — those are pure stock market indexes. The balanced fund is probably more of a 50/50 type mix, maybe 60/40. And so one of the key questions for everybody with their asset allocation is how much should I have invested in stocks, how much in bonds?
And so do you know offhand, Jeff, how that's split up?
Caller:
Yes, sir. I think there's only about $40,000 in the balanced fund, and I think the S&P is about right at $400,000. And the Russell is the remaining balance of that. I mean, I'm seriously thinking about — I hear Rob talk a lot about Certified Kingdom Advisors and, of course, your company, Sound Mind Investing. Do you do individual investment advice? Do you give that type of advice?
Mark Biller:
We do through our SMI Advisory — it's kind of sister company — Private Client. And you can find information about that at soundmindinvesting.org.
But I do like that idea, Jeff, of getting somebody to help you with this, and not just for the investment-management side, although that's — they will help you, either us or our Kingdom Advisor, any professional's going to help you get that asset allocation locked in. And it does sound like you're pretty heavily aggressive to the stock side right now.
But what we also see, Jeff, is there are so many decisions right around the point where you're at — you've just retired, your wife is still working. Figuring out the optimal time for each of you to start drawing Social Security benefits — that can be a huge lever for people making a good decision there, versus a mistake there can compound to many thousands of dollars over the course of retirement. And those are the types of decisions that a good advisor will be able to help you with. So I really do like that idea quite a bit.
Rob, what are your thoughts on all this?
Rob West:
Yeah, I would totally agree with that. I think it is time to start moving more toward a properly balanced portfolio. I mean, at age 60, we would say that a good starting point would be a 60/40 portfolio, but you're kind of like a 95/5 right now — stocks to bonds. And I think starting to move in that direction is going to take some out of the more risky side of this equation, especially given what we've been talking about today with the momentum of the market.
But now, having an advisor — you've built this portfolio, so I think as you move out of that limited menu of investments into an unlimited menu of investments, this is where professional investment advice could really shine, whether that's Sound Mind Investing and their great team there at soundmindinvesting.org or finding a local CKA there in Georgia: FaithFi.com.
In either case, Jeff, I think getting some wise counsel to the table here moving forward makes a lot of sense just based on where you're at. So thanks for your call, sir. We appreciate it.
Hey, stay on the line. We'll send you a copy of the Sound Mind Investing Handbook that I think will be a great resource for you.
Mark Biller, grateful for you, my friend. Always loved my time with you.
Mark Biller:
Oh, I really enjoyed it, Rob. Thanks for having me.
Rob West:
All right, folks. If you want to check out this article, it's a great one. You'll find it at soundmindinvesting.org. It's called Bull Market. Great! But Don't Get Carried Away. Again, that website: soundmindinvesting.org. You can become an SMI subscriber. You can even check out the Private Client group.
I'm Rob West on behalf of my incredible team — Patty, Adam, Jim, Taylor, and everybody here at FaithFi — the Lord bless you! We'll see you tomorrow. Bye-bye!
