SMI on the Radio: The Bear Market, Bank Failures, and Questions From Callers (audio and transcript)

Mar 22, 2023
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The bear market and uncertainty in the banking sector were among the topics SMI's Mark Biller discussed yesterday with host Rob West on American Family Radio's Faith & Finance program.

Mark also answered questions from listeners.

Click the arrow below to listen. Scroll down for the transcript.


Faith & Finance (formerly MoneyWise) airs weekday mornings on AFR. A different version airs weekday afternoons on Moody Radio.

(For more radio appearances by members of the SMI team, visit our Resources page.)


Transcript

Rob West:
If patience is a virtue, how do we apply that to our portfolios? I'll talk about it today with Mark Biller, and then it's on to your calls at 800-525-7000. This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions.

Well, my guest today is Mark Biller. He's executive editor at Sound Mind Investing. And if there was ever a time for "sound mind" investing, it's now with all the ups and downs on Wall Street!

Mark, great to have you back with us.

Mark Biller:
Thanks, Rob. Good to be back with you.

Rob West:
Well, Mark, as you might imagine, we're getting calls every day from folks who are despondent about the losses they've suffered over the past year in their portfolio. So maybe we can start today with some encouragement. What would you share with them?

Mark Biller:
Well, Rob, I think the first thing I'd do is remind them that time is on the side of the long-term investor. And this has always been true. It was true after the big losses after the 2008 financial crisis. It was true after the COVID shock in 2020. And it's still true after last year's losses, whether or not the spare market is over yet.

And then I'd try to encourage them, Rob, with the fact that the U.S. stock market has been remarkably resilient over longer periods of time. If you take a portfolio, divide it just 50/50 between large and small company stocks over the last 95 years or so, that portfolio has returned about 11% per year. And just think about everything the market has been through over that time span, the Great Depression, a World War, and so on and so forth.

So over long periods of time, there's a lot to be optimistic about.

Rob West:
Yeah, and that's certainly encouraging. It, of course, doesn't tell us what the return will be this year though, right? <laugh>

Mark Biller:
No, it certainly doesn't. And that average does obscure some really wild rides along the way.

You know, we've had 12-month periods where stock market losses were as horrifying as 69% and gains as breathtaking as 240%. And actually, those two periods came back to back in 1932 and '33. So it can be a very wild ride.

And it's interesting to note that it's actually really uncommon for stocks to return close to that 11% average in any particular year. Only about 5% of those 12-month rolling periods over the last century have been within 1% of that 11% average.

So what that means is that the stock market's returns tend to be all over the place. You have big up years, big down years. And yet, if you can hold on and remember that time is on your side over the long term, then the greater the likelihood of your success and getting those long-term 11% type returns.

Rob West:
Yeah, and that's a really key point. Mark, I would, of course, add that patience is on the side of the long-term investor.

You write about all this in a recent article at soundmindinvesting.org. It's titled Market Probabilities: What the Past Suggests About the Future. And you have a really interesting chart that unfortunately we can't show on the radio, but maybe you can give us a mental picture.

Mark Biller:
Absolutely. And I'd also encourage listeners to go to your website or to soundinginvesting.org and check out this chart because the visual is really helpful. But basically, it just shows that if you randomly picked any 12-month period from 1926 to 2022 to own stocks, you would've had a 74% chance of making money over that 12-month period.

And then the chart also shows these same types of probabilities for holding periods of one year, two years, three years, all the way out to 10-year holding periods. And that's where the numbers are really so reassuring.

The probability of making money over a five-year holding period has been 89%. And as you get out to eight to 10-year holding periods, the likelihood of losing money falls to just 2% to 3% of all of those 8-to-10-year rolling periods. So when you look at it in that light, Rob, you know, a 98% or 97% chance of making money is pretty good!

And that's why SMI and most other financial advisors typically will tell people that you need at least a five-year holding period in order to be in stock investments. And really, a 10-year holding period is better.

And this is the type of data that backs up those statements.

Rob West:
And this chart reflects a period of time from 1926 all the way through 2022. So this is a pretty large span of time. And you can look at any 12-month period in that time and see how this breaks down. Again, you can check that out at soundmindinvesting.org.

By the way, in just a moment we'll be getting to your questions for Mark Biller today. Perhaps you're wondering about your own stock portfolio. How should you think about this volatility? Are you invested properly for your age and risk tolerance? Where's the economy going? Whenever you'd like to chat about investment-related for this portion of the broadcast, we'd love to hear from you. With lines open — 800-525-7000. Give us a call now.

Mark going back to the chart for a moment, this assumes certain things in terms of the performance that we're talking about — like that your portfolio's being properly diversified, correct?

Mark Biller:
Yeah, very much so. This study really reinforces the importance of diversification. You know, in the article, we note that the S&P 500 index — which is what a lot of people pay attention to, but that's really just a measure of large-company stock performance — that index was actually negative, minus 1.4%, over the 10-year period that ended in 2008.

But if we diversify that portfolio very simply, by just splitting it evenly between large and small company stocks, that 10-year loss flips to a small gain.

So, you know, one of the main points of this article and the chart that we're talking about is to show how volatile these stock market returns are over the short term, but how that volatility rapidly diminishes as you stretch out your time horizon.

So the big thing to take away from this discussion, Rob, is that over the short term, returns are very unpredictable. But they become much more predictable the longer the time horizon extends.

Rob West:
All right, we're going to continue this conversation with Mark Biller — plus we want to get to some of your questions today related to the market and your investment portfolio. 800-525-7000.

Let's head to Kentucky. Elijah, go ahead.

Caller:
Yes sir. One of our banks is offering 4-and-a-half percent for 5-year CD. Is that a good idea?

Rob West:
Yeah. There's better rates than that. When you're talking about going out five years, you can do about as well as that — perhaps even a bit higher than 4-and-a-half —with an online bank, even at 18 months.

But Mark, just in general, who would you say CDs are for? And do you like where rates are at right now in terms of that being a viable option for your very safe money?

Mark Biller:
Yeah, I do. Y'know, it's the first time in 15 years that savers have actually had good options for savings accounts, and that includes things like money market funds, it includes CDs. So these are things that have really been kind of off the table for a long time. So it's fun and encouraging to be able to talk about 'em again.

To your point, Rob, I wouldn't be super enthusiastic about tying up my money for five years here — especially when just a good online bank money market [account] is probably yielding something close to that 4 to 4.5%. And you could probably do a six-month to one-year Treasury bond at TreasuryDirect and get similar rates. So five years for that type of rate — y'know, you give up a lot of flexibility. But on the flip side, if you know you're not going to need that money and you want to lock in these rates, if you're concerned that rates could go down, then maybe you would want to lock in a little bit more duration, a little more time.

But generally, I would tend to preserve the flexibility, go for a shorter-term instrument — and maybe even just a money market fund, which gives you ultimate flexibility.

A lot of it Rob, of course, depends on what your goals are. So if this is money that is absolutely designated for emergency savings, it's not going anywhere else, that's one thing. If this is money that you might want to take advantage if the market were to have a big decline and want to have some of that capital available to buy low — y'know, we always want to buy low and sell high, but the really hard part of that is buying low. So having that, that dry powder, that flexibility to take some of that cash that you have on hand and deploy it if we do see a real steep drop at some point, that can be a real advantage.

So those would be my thoughts. Do you have anything else to add, Rob?

Rob West:
No, I think that's very good. Bankrate.com is a great resource, Elijah, for you to compare CD products. You'll find 5-star-rated FDIC-insured online banks paying — to Mark's point — I'm seeing 5% for 14 months, so just be sure you shop it around.

Mark, I think one key point to make, though, is for folks that are in the market and just frustrated about the volatility, this is not the time — as attractive as these rates are — to pull it out of the market while it's down to "take advantage" of these rates when you're gonna miss the recovery.

And that's going to really affect that [market probabilities] data you were just sharing with us because if we try to time the market, we're probably going to get it wrong.

Mark Biller:
Yeah, the data's pretty clear that most individuals, when they try to make those types of timing decisions, end up shooting themselves in the foot. So I would agree with that. Yep.

Rob West:
Very good. Mark, we haven't asked about the banking sector yet — obviously a lot going on there. You know, we've seen not only the event occur starting with Silicon Valley Bank and then spreading to a few others, but we've seen the government response.

What's your take just on whether this is something that's very isolated and somewhat behind us, or whether we're going to still see this spill over into other banks perhaps going forward?

Mark Biller:
Yeah, that is a great question, Rob and the <laugh> — the simple answer is we don't know yet, and there really is no way to know yet. And that is because [of] the nature of the banking system. You may have heard the terms that we have a "fractional reserve" banking system. And all that means, simply, is that banks take in deposits from individuals, and then most of those deposits are not held at the bank. There's no vault with all of that cash sitting around. They take those deposits and they lend that out in the form of mortgages, commercial property loans, personal loans, business loans, all that kind of stuff.

And so as long as the economy is growing, that system tends to work great because most of the [depositors] don't need their money back at any particular point. So that "fractional reserve" — with most of the cash being out in the economy and out in businesses — works great.

The problem is when the economy contracts, there's always that potential that more people start wanting their cash back from the bank. And if we get to an extreme imbalance where enough people are asking for their cash back, the bank doesn't have it — they have investments. And those are often tied up in loans, and even if they own something as safe as a short-term government Treasury bill, that's still a loan to the government.

So what we've seen with this recent crisis is a situation where, at these specific few banks, a lot of the depositors were asking for their cash back for some very specific reasons that were specific to those banks. And the banks had to sell some of their very safe investments. We're talking about Treasury bonds, mortgage-backed securities — this is safe stuff. This isn't dodgy investments, which was kind of the issue back in 2008. But these banks had to sell at a loss, and that put them out of balance on their balance sheet.

Rob West:
Yeah. They're selling at a loss. And that was obviously a difficult situation for Silicon Valley [Bank] in particular because it seemed like they didn't manage their risk portfolio very well.

Is that really the issue here? Are there other banks that have, you know, not managed their portfolios well — or could it be beyond that?

Mark Biller:
Yeah, I think that Silicon Valley did a particularly poor job of that, and they had some unique circumstances with their depositor base. It's very concentrated in high-tech-startup type companies. So their situation is kind of unique. But the structure we were just talking about is pretty universal. That's just the banking business. And that's why we can't really say that the problem is over and there won't be any issues.

But this is crucial, Rob. There are really two different lenses to view this through. One is through the lens of a depositor at a bank. I have a bank account where I have deposits. The other is, what is the potential for this to be a disruption to the markets as an investor?

There are two very good reasons why as a depositor, most listeners can have a lot of confidence that they're not in danger. First of all, the FDIC [the Federal Deposit Insurance Corporation] provides insurance to individual depositors at FDIC-insured banks of up to a quarter of a million dollars. So in these types of situations, if your account at your bank — as long as it's an FDIC-insured bank, which most of them are — you really have very little to worry about in terms of losing the money you have deposited at the bank. Then beyond that, what happened a week ago was the Fed and the regulators basically "beefed up" that insurance, if you will. They didn't make this universal, but the trend is clear that with these banks that have been running into trouble, they are extending that $250,000 even beyond that.

So the point of this, Rob, is for all but very, very unusual individuals and a little bit larger businesses, if you're under $250,000 in your bank, your money is pretty safe. You're insured on that. So you don't need to worry about this as a depositor.

Where we could run into more problems is most businesses need more than $250,000 of cash liquidity just to run their business. You think about making payroll for a larger company, they're going to need more cash. So what this is doing is these businesses are looking at these smaller regional banks and saying, "I really can't afford to keep my larger accounts with these more local banks. I have to move them to the big banks" — the dozen or so really big banks, the JP Morgans and so forth. And so that movement is just exacerbating this issue for these regional banks as these business accounts are pulling deposits from them.

It's just kind of reinforcing this same hamster-wheel problem that we're talking about. And that's why it's really difficult to say, well, no, we're at the end of this.

We can't say that we don't know. I mean, it could be that we're at the end of this, and this is all we're going to see. But it could also be that as this tightening credit dynamic — which is what we've been talking about for a year now with the Fed raising interest rates and draining financial liquidity out of the system — that this could be more of the early warning signs that that "contracting credit" dynamic is causing problems that are just now starting to surface.

So as an investor, that's something that I'm concerned about because that has the potential to roil the investment markets. But as a depositor, I'm not worried about losing the money that I have in the bank.

And I know this can be complicated. I've actually written two fairly detailed articles about this on our soundmindinvesting.org website in the last week. So if people want to learn more about this and kind of take their time walking through this, I think those two articles will be really helpful for them.

Rob West:
Very good. Soundmindinvesting.org. Let's head back to the phones — Jackie in Colorado. Go right ahead.

Caller:
Oh yes, hello. We have like $200,000 in an intermediate-bond [fund]. It's non-qualified. It was just cash for us and, of course, that lost like 13%. We have plenty of other cash money, so I'm just wondering what would be good to do in that situation — if we're diversified in the right way in the other money that we have in qualified accounts? Should I, do we expect intermediate bonds to do something good? I mean, are we waiting five years anyway. So then, do we put it into stocks, half of it, or what do you think?

Rob West:
Yeah, great question, Jackie. Mark, your thoughts?

Mark Biller:
Yeah, Jackie being in bonds has been tough over the last 18 months or so. This has been the worst bear market for bonds in many decades. And so the longer the term of the bond, the more painful that's been. Long-term bonds have been the worst, intermediate-term a little bit less bad, short-term a little bit less bad than that.

The good news for bond investors at this point is that we've had this long rate-hiking cycle and we've had a very dramatic move in interest rates. It appears as if the economy is slowly weakening and perhaps heading towards a recession. And, of course, that is not good news overall. However, for bond investors, interest rates almost always fall during recessions, and as interest rates decline, bond prices go up. So bond funds tend to do very well in the type of environment that we are kind of expecting is going to play out over probably the rest of this year.

Now, this doesn't mean put all your money in bonds and leave it there for 10 years, and that's not what I'm saying. But what I am saying is you've endured quite a bit of pain over the last many months and I think that the next several months to a year, year-and-a-half, are going to be much better for bond investors. I would not be in a hurry to move that money at this point.

Rob West:
Excellent. Thanks for your comments on that. Jackie, thank you for your call.

Mark Biller with us today, being very generous with his time. Much more just around the corner on Faith & Finance on American Family Radio. Stick around. We'll be right back.


Rob West:
Let's head back to the phones. To Tennessee. Hi, Mark. Go right ahead.

Caller:
Good morning.

Rob West:
Great to have you, Go ahead, sir.

Caller:
Yeah, I just had a question about your feelings on [leaving money in] 401(k)s after 59-and-a-half and you're going into retirement. What's a wise position to take? Is it, you know, a rollover? Is it, you know, 'cause you hear a lot about Roth IRAs, or you take a portion, leave a portion, or leave the whole thing in?

Rob West:
Yeah. Couple of questions for you, Mark, and then we'll get Mark Biller to weigh in. So you have retired, or retirement is upcoming?

Caller:
Retirement's upcoming.

Rob West:
Okay. And how much do you have roughly in this portfolio?

Caller:
Neighborhood of $600,000.

Rob West:
Okay. And have you done your retirement budget? Do you have a good sense of what it'll take when you get to retirement to fund your lifestyle?

Caller:
Yeah, pretty much. I think so.

Rob West:
All right. And what will be your income sources in retirement to cover that? Will it be Social Security? Will you have to draw an income from this portfolio to supplement that?

Speaker 5:
No, I mean [I] still have Social Security [and] a retirement from a company. So I mean the 401(k) would be something like a supplementary thing.

Rob West:
Okay. So you wouldn't expect to have to draw any regular income. You think the other retirement sources —your company retirement plus Social security — should cover your bills?

Caller:
Yeah, I think it should. This would be something to where you would have it, and it would be something to where if, you know, [make] investments or anything else.

Rob West:
Sure. Yep. And is your main question about whether to roll it out [of the 401(k)] or leave it? Or, how it should be invested in retirement?

Caller:
How it should be invested. I was just trying to see, you know, as far as like, you know, [what's] upcoming and how the market seems to be moving.

Rob West:
Yeah, very good. So, Mark, maybe an explanation just on the type of account but also then the investments in the account — given this will be really excess that will be available to be managed and grow it, but he doesn't need it to live on in retirement.

Mark Biller:
Yeah, absolutely. Mark, these are good questions to be asking as you're approaching retirement. I think the biggest thing to understand is that whether your money is in a 401(k) or an IRA — whether that's a Roth IRA, traditional IRA, all these different labels — these are all different types of accounts that you can largely own the same investments within any of these types of accounts.

So the decision of do I keep the money in a 401(k) or move it to an IRA is really a decision based on a couple of things. One: Can I invest the money the way I want to within my 401(k)?

So for someone who's very content in index funds and they have those options in their 401(k), they don't really have any changes they want to make to how they're investing, then as long as the 401(k) is a relatively cost-effective tool, which a lot of them are — it's always good to check on the expenses you're paying — but as long as your expenses are reasonable and you don't have a desire to make changes to your investments, then staying in the 401(k) is going to be easier, and probably it's going to be perfectly fine for that person.

Where the advantage sometimes comes into moving to the IRA is if someone has limited options in their 401(k) and they really want to be investing their money differently — but they don't have access to those choices —then moving over, "rolling" it to an IRA can open up the options that you have from an investing standpoint. So that's how I would kind of distinguish between the two.

But you want to be careful, because a lot of times the IRA is going to be slightly more expensive just because as you move into other investment types away from the index funds that tend to dominate within 401(k)s, you can end up paying more fees. So that's something to keep an eye on as far as how to invest that money.

Generally, as you're moving into retirement, you want to keep getting a little bit more conservative on a gradual basis. But at age 59-and-a-half, you also have to be thinking there's a very good chance that you could live two, three more decades and need that money to last. So you don't want to get too conservative too fast, you want to just kind of roll that down the risk gradually as you move into retirement.

Caller:
Yeah, that makes sense. You know, I did hear about people saying sometimes it's better to leave it in the 401(k) because of fees, et cetera. You know, it's just, as far as withdrawing, how you go about drawing? And do you draw it and then put it in something else? I know the tax risks and everything. So [it] gives you something to think about.

Rob West:
The only other consideration, Mark, would just be if you want an advisor to — you know, this is a lot of money, you've spent a lot of time building this wealth — and if you'd rather have an advisor who's giving more direct oversight to it, and IRA's probably gonna give you that flexibility that you don't have in the 401(k). But as Mark Biller said, if you're happy with what you have and you've taken the appropriate steps to stay invested, but get more conservative commensurate with your age, then you certainly could stay right there. Thanks for your call today, we appreciate it.

To Georgia. Hi, Angie. Go right ahead.

Caller:
Good morning. Good afternoon.

Rob West:
<laugh> Hi there.

Caller:
I have — well, first of all, I am 54 and I'm retired, so I have a 401(k) retirement. I have money in a Roth, and then I have some other money in a qualified conservative individual account, which I draw off of monthly. It's not much, but I do., And right now, it's not making anything. It is losing. My thought was transferring this over to an annuity with a 3% or 3-and-a-half percent lifetime [annual return]. That's locked in. I just need to know, is that a smart move or not?

Mark Biller:
Yeah. You know, the annuities often will lock you in. So you want to be really sure before you make that move — that you like that type of return. If that's a relatively small piece of your overall pie, then having that guaranteed return could be appealing, and it may be worth considering that.

I would definitely have a lot more reservation if you were wanting to take the bulk of this — like your Roth IRA or your 401(k) and lock that in. Because you do have to consider what's the impact of inflation and is that 3 to 3-and-a-half percent return even going to keep your purchasing power even relative to inflation over time. I'd say that's close to a 50/50 type of proposition with the way inflation looks right now.

So if it's a small piece and that gives you some peace of mind to know that you have that guaranteed income piece, then that's okay. Just keep an eye, as always with annuities, on the fees and expenses there.

Rob, your thoughts?

Rob West:
Yeah, I completely agree. I think that's great counsel. Angie, I hope that helps you. Thanks for being a part of the program today. God bless you.

Well, Mark, we've covered a lot of ground today. Any final thoughts on this article we've been discussing before we wrap up?

Mark Biller:
No. I think the main point, Rob, again, is [to] have that long-term perspective. You know, there's a lot going on right now. There's a lot of fear-based headlines flying around right now. Just step back, take a deep breath, pray, ask for guidance, ask for peace, and try to maintain that long-term perspective because time really is on the side of the long-term investor.

Rob West:
And Mark, if they want more information, where do they go to get that?

Mark Biller:
Soundmindinvesting.org.

Rob West:
All right. Thanks for being with us, my friend. We're grateful for you.

Mark Biller:
Thanks, Rob. Always my pleasure.

Rob West:
All right. On behalf of my team today — Robert Sutherland, Devin Patrick, and Pat Montague — I'm Rob West. Mark Biller also with us today. We've covered a lot of ground. So thankful for your calls and questions today!

Hope you have a great rest of your day and come back and join us tomorrow. We'll see you then.

God bless you. Bye-bye!

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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