No one really knows how the stock market will perform in the short term, i.e., over the next 3 years or so. Things could go up, down, or sideways — or all of the above. However, if you invest for the long term (at least 10 years), you can have a reasonable expectation your money will grow.
But what about the intermediate period? How are things shaping up over the next 3-to-10 years, especially given that the current bull market has been running quite a while?
SMI’s Mark Biller joined hosts Rob West and Steve Moore to discuss that yesterday on MoneyWise Live from Moody Radio.
Mark also answered a caller's question about moving to more-conservative investments as retirement time draws closer, and another about "day trading" with surplus funds.
To listen, click the play button below— or, if you prefer, scroll down to read the full transcript. (And for more radio appearances by members of the SMI team, visit our Resources page.)
MoneyWise Live airs daily at 4:00 p.m. ET/3:00 CT.
To ask a question on a future program, call 1-800-525-7000 and mention you have a question for either Mark Biller or Matt Bell of Sound Mind Investing.
Transcript
Steve Moore: We always like to have guests join us for their expertise, and when it comes to investing, Mark Biller is one of our favorites. Mark manages mutual funds at Sound Mind Investing, where he’s also executive editor of the SMI newsletter. Today, Mark’s still suffering a tiny bit of jet leg, as he has just returned, this is what I read, from a trip to England, where he hand-delivered a leather-bound copy of The Sound Mind Investing Handbook to the royal couple — at least that’s what I’ve read. All I know is what I read.
Mark Biller: That’s what you read, huh?
Rob West: I’m not sure what your source is on that, Steve. I guess we’ll take you at your word. I will say, Mark, a delight to have you here today. Looking forward to chatting with you.
Mark Biller: Thank you, Rob. I don’t know where he comes up with that stuff. If it’s on the internet, it must be true, right?
Steve Moore: Of course.
Rob West: I heard you use the word crumpet, and I just assumed you’ve been over the pond, that’s all I know.
Mark Biller: There you go. That’s fair.
Rob West: I love it. Let’s dive into the topic today, Mark. I always look forward to my latest edition of the SMI newsletter. Today, we’re going to unpack an article you wrote for the current edition, called "The Stock Market In 3D." Tell us what you mean by that, 3D and investing?
Mark Biller: Yeah. Investors often get confused because they hear these seemingly conflicting statements about the market. A young person might have one person tell them that they need to invest heavily in stocks for the long term, but then somebody else tells them, the market’s currently expensive and it’s risky as a result. The fact is, both of those statements are actually true, but it’s hard to know what to do with those conflicting pieces of information. The key to sorting that out is recognizing the outlook for the stock market varies over different time periods.
That’s where that 3D idea of this article titles come in, that there are these three distinct time periods to understand.
Steve Moore: We’re going to go to a break here in about 30 seconds. We don’t have time to talk about them yet, but we will. Just quickly give us the three time periods we’ll be looking at.
Mark Biller: Yeah. Sure. You’ve got the short term, which is what’s about to happen next, then you’ve got the long-term which are periods of 10+ years, and then the tricky one are those intermediate term periods like the next three to nine years. Just over the horizon, but not quite the long-term averages.
Steve Moore: We’re discussing investing, 3D investing today with our host, Rob West, and our special guest, Mark Biller from Sound Mind Investing. Stay with us, and we’ll be right back.
Steve Moore: Hey, today is a great opportunity if you have investing questions or comments, because not only is Rob West here, but mark Biller is here from Sound Mind Investing. Later on, we’ll tell you about the Sound Mind Investing handbook and what the great guys do over at soundmindinvesting.org. Suffice to say, they know their stuff, they know the Lord, and they’d be happy to take your investment calls and questions today at 1-800-525-7000. 800-525-7000. We have open lines.
Rob West: Mark, we’re talking today about your article in the latest SMI newsletter, "The stock market in 3D." Just before the break, you referred to the fact that you’re talking about these various time periods we look at when it comes to investing. The short term, which is zero to three years, the long term, 10+ years. Then, this intermediate term that lot of times, people have the most difficulty navigating of three to nine years. Why do you feel like that’s a challenging time period?
Mark Biller: Yeah. I think it’s because you can define the other two pretty easily, Rob. Over the short term, if you’re being honest, nobody really knows what the market is going to do next. People who say they do, really are just giving an educated guess. The short term is inherently unpredictable. The long term is the opposite. When you look at market history and you look at long periods, you get fairly predictable results. You really can plan and estimate based on what you can expect over the long term. It’s that period in between the two that is really tricky.
While it’s impossible to predict exactly what’s going to happen over the intermediate term, what we find is that you can tell a lot based on current market valuations.
Rob West: Yeah. That was one of the things I appreciated that you did in this article, is you really began to unpack what you see and your team sees in the current market valuations, that give us quite a bit of insight into what we might expect in this intermediate-term period of between three and nine years. Give us a sense of what you’re seeing.
Mark Biller: Yeah. Absolutely. I wish it were a little bit better news, but basically, what you get when you look at valuations, is you can compare with past periods and past periods of high and low valuations, and today, what we see are stock market valuations are very high. By some measures, the only period where they’ve been higher was at the end of the 1990s dot-com bubble. Of course, that’s sobering, because after prices got this high the last time, that following decade saw a couple of deep bear markets. Now, that doesn’t mean that we’ll necessarily follow that same course, but generally speaking, when you have very high valuations, returns tend to be lower over the next decade or so, as they come back towards those historical averages.
The flip side is true, when they’re very low, in the middle of a deep bear market, they tend to be good over the next decade or so, that intermediate period, as they come back up toward those long-term averages.
Rob West: When you talk about valuations, you’re basically talking about the price for the companies, versus what people are paying for them, and their earnings and so forth? Give our listeners a better understanding of what you mean there.
Mark Biller: Sure. Yeah. There are lots of different valuation measures that investors use. The most common ones are based on how much investors are willing to pay for a dollar of current earnings. You can compare that over history. In the past, investors were willing to pay say, $15 for $1 of current earnings. In other words, that’s the multiple on the company price, the stock price. You can get a gauge of how expensive the market as a whole, or a company as whole, is. That’s where you hear people talk about these really sky-high valuations of maybe 150 times earnings or 200 times earnings on some of these high flying stocks, like Amazon and Netflix.
You can look at the whole market and see that at 20 to 25, depending on which measure you’re looking at exactly, or even 30 if you’re looking at some of the longer measures of earnings, that the market is priced very highly. What that really means is it’s priced for everything to go right. If everything doesn’t go right, then investors start reevaluating and saying, maybe we’re paying a little bit too much, given the amount of money these companies are earning.
Rob West: We’ve got the fact that you note here, that we’re at high valuations, in fact approaching record highs, then we also have something that you alluded to in the article, and that is just what we can see historically. You make note that full-blown bear markets, that is the broad market declining 20% or more, tend to come along at least one per decade, while a market correction, that is of at least 10%, they happen generally every year or two. Given that we’re probably nine years into a bull market, that would also add to this case that we may be in for some rocky times, at least in the intermediate term, right?
Mark Biller: Yeah. That’s exactly right. There’s nothing magical about the specific decade time periods. They’re nice round numbers, so people like to look at them. I have seen that if we get through the end of this decade, that we’re in right now, without a recession, it will be the first decade that the US has not had a formal recession since the 1850s. These things do come along on a cyclical basis, and both with the economy and its expansion, and the bull market, we’re long in the tooth.
It’s just another reason really for people to be cautious, not necessarily to go out and sell everything, but just to understand where we are in the cycle, and to maybe pull in their aggressiveness just a little bit, which is really the opposite of what most people do when the market has been good, they tend to get more aggressive. We’re just trying to caution people, don’t get more aggressive here, maybe be a little bit more cautious.
Rob West: Yeah. You’ve got to prepare yourself financially, which is as you said, making sure you look at your allocation, make sure you’re not overly aggressive. You also need to prepare yourself emotionally, don’t you?
Mark Biller: Yeah. Absolutely right. That’s really the main reason why we put the statistics that you’re mentioning in that article, because we’ve always felt that if we can equip our readers for what to expect emotionally, it’s always easier to deal with a situation if you know it’s coming in advance. It’s really hard when you get blindsided, if you get swept up in the positive emotions of the market, you invest a bunch of money and think that things are going to be great, and then get blindsided by a market downturn.
If you know these things happen every so often, and have a feel for the rhythm and the cycles, you can withstand that and avoid making the really significant mistakes that people make when they’re afraid, during down markets, and selling into those bad prices at the bottom of bear markets. That’s what really ends up hurting people over the long term.
Steve Moore: Guys, let’s take some phone calls. 1-800-525-7000. Paul is in Tampa, Florida. What’s on your mind today, Paul? Something with your 401(k)?
Paul: Yes, sir. My wife’s about nine years from retirement, and we’ve been maxing it out for a long time. We’ve got about $900,000 in there. I’m wondering if we should be pulling back to the more conservative investments in that, or if we should just be going all Roth IRA with what we’ve investing?
Rob West: Okay. Mark, nine years out, what are your thoughts?
Mark Biller: Yeah. I think that you definitely do want to start considering, once you’re inside a decade from your retirement date, it’s definitely appropriate to start thinking about scaling back your risk a little bit. That usually means moving some money out of stocks and into bonds. I don’t think you want to go way overboard with that, either. The reason for that is, that these days, retirement is not the end of the line. Most people are looking at two, maybe even three decades that their money is going to have to last. Again, if you have decades of time frame for your investing, then you still definitely want to be taking advantage of a healthy stock allocation.
I would not recommend going too deep on that, but shifting that a little bit is certainly appropriate. We might be getting more from the maybe 80/20 range, to maybe more the 60/40, that type of allocation. Of course, that’s going to vary from person to person, with their individual risk tolerance. That’s a general broad guideline that I would throw out there. What do you say about that, Rob?
Rob West: I completely agree, that’s a good word.
Steve Moore: Paul, we appreciate your call today, hope that helps you. We have two Mike’s coming up next, but we have to pause for a brief break. Then we’ll talk to Mike in Cleveland and Mike in Morrisville, Indiana. Of course, we’d like to chat with you about anything financial today, investing included of course. 1-800-525-7000. More MoneyWise Live after this.
Steve Moore: We’re very happy you’ve joined us today on this Monday edition of MoneyWise Live, 1-800-525-7000. Our special guest, Mark Biller from soundmindinvesting.org. Cleveland, Ohio, Mike, thanks for your patience. What’s your question?
Mike: Hi, Rob, hi Steve. I am a big fan of the show and I appreciate you taking my call.
Rob West: Thank you, buddy.
Mike: Yeah. Mark, I appreciate your ministry as well. I am familiar with it. I just wanted to call to get some, maybe some investment tips on what I should do. I can give you a little bit of background. My wife and I own our own small business, and the business does pretty well. We have no business debt. We have no personal debt as well. We don’t have a mortgage or car loans, and no credit card debt to speak of. We do tithe off of our income that we draw from the business. We both have some Roth IRAs that we contribute the max to every year, and some SEP RIAs as well, that we contribute to from the business, for both of us.
We have about a year’s worth of income in liquid savings as well. I was just wondering, what my next step would be, as far as, any further surplus that I take in, what should I be doing with that?
Steve Moore: Mike, it sounds like you’re the Sound Mind Investing poster child. I love what I hear. Mark, what thoughts do you have?
Mark Biller: Yeah. That really is a great setup, Mike. I assume that you’re already contributing the maximum that you’re allowed to in the SEP IRA?
Mike: Not every year. It depends on how much profit there is left over at tax time, at the end of every business year. If it’s something where I have enough profit in the business to contribute the maximum, I will. If I don’t, then I just contribute what I can to the SEP.
Mark Biller: Sure. That is going to be probably the most tax-efficient way to continue to invest beyond what you’re already doing. I wouldn’t always recommend that somebody do all of their saving necessarily within IRAs, but I do like the fact that you’ve got the Roth’s, and Roth IRAs, you may or may not be aware, you can always take out your contributions if you need them without paying penalties or taxes. That gives you a little more flexibility, maybe to put more into the SEP IRA and be a little more aggressive with funding that.
Of course, Mike, there’s never anything, there’s nothing wrong with funding a taxable investment account. You just want to because a little bit more selective with the strategies that you use there, probably leaning more towards index funds and things that you’re not going to be trading very often, because of course, every trade is going to be a taxable event within a taxable account, whereas you don’t have to worry about that in your Roth and your SEP IRA.
You could balance that between your desire to load up that SEP IRA and also a taxable brokerage account, if you want to have a little bit more flexibility and not have it all tied up in IRAs. Really, you’ve got all good choices, Mike. You’ve put the groundwork in place that you’re not really going to make any bad decisions there from what I’m hearing. Rob, do you have any thoughts on that?
Rob West: I like what you’re saying there, Mark. Mike, the only thing I would add is, I think this is an opportunity for you and your wife to begin thinking about two things. One is, what we call the financial finish line, how much is enough, and I think you need to prayerfully ask that question. As a part of that, you should be well-planned. Perhaps, either work with your existing advisor or find another financial advisor who can help you work through that process, both financially, but also spiritually.
Then secondly, once you have that finish line established, then the question is, how do you maximize your giving, potentially even out of assets, in addition to cash. I’d be thinking about both those things. We appreciate so much, you calling today. Steve, let’s try to get one more caller in before we hit the break.
Steve Moore: We’ll do it, Riverside, Ohio, Diane, we have about two and a half minutes, let’s squeeze it in, okay?
Diane: Okay. It’s Riverside, Iowa, not Riverside, Ohio.
Steve Moore: I apologize, I am so sorry.
Diane: That’s okay. Yeah, that’s all right. I love Iowa. Anyway. My husband and I are close to retiring. He would like to retire next year. He’s 69. We have about $700,000 in IRAs, semi-annuities, and stock in the stock market right now. The only thing that we are really paying on is the house. The rate on that is 3.25, I think. We have about $75,000 left. I was wondering, would it be a good idea to maybe take some of that $700,000 out and just pay the house off?
Rob West: Yeah. Great question. Mark, we’ve got about 45 seconds.
Mark Biller: Diane, you probably have some of that money allocated to bonds right now. If that debt is making you uncomfortable, if you would like to lean in that direction, if you’ve thought about getting a 3.25% return from those bonds, that would probably be pretty good in this environment. Using a little bit of that money to pay down or pay off the mortgage probably wouldn’t be a terrible idea.
But, with that low interest rate, the flip side is, you don’t really need to be in a huge hurry to pay that off. I definitely would not be paying any early penalties or taxes to withdraw. That would be my quick take on that, Diane. Rob?
Rob West: I totally agree. Mark, can you stick around for a couple of minutes after the break and take another call or two with us?
Mark Biller: Yeah. Absolutely.
Steve Moore: All right. Mark Biller from Sound Mind Investing. Iowa is our state of the day. Thanks for joining us, this is MoneyWise Live.
Steve Moore: This is MoneyWise Live, I’m Steve Moore. That guy to my left, that’s Rob West. Now, this other guy over here to my right, no, Faye, turn your radio around the other way. Okay — that right, that’s Mark Biller, he’s with Sound Mind Investing. We’re talking about investing today in AM radios, which I think are going to make a comeback. I bet you Mark doesn’t agree with me.
Rob West: I have a feeling you’re right.
Mark Biller: Put me on the spot, huh?
Rob West: That’s not a big spot, really, is it?
Mark Biller: No, I guess not.
Rob West: Hey, want to talk about day trading? Can we do that? We have Steven with us from Indianapolis. You’re on with Mark Biller and Rob West, Steven. What’s cooking?
Steven: Hi. I had a hypothetical question about day trading. If I have money set aside, say $10,000, and I have an emergency fund and I have a IRA started, and I’m young, is it all right if I can day trade with some of that money?
Rob West: Which parts of that were hypothetical?
Steven: Some of it.
Rob West: All right. Mark, what are your thoughts?
Mark Biller: Yeah. You know, Steven, it’s a really interesting question, because I think that you can make a distinction almost between an idea that most planners can generally get on board with, which is having a set aside little mad money pile that you trade with, maybe that you try to go after some ideas that are exciting to you and trade stocks and things, that’s outside of the whole rest of your plan. That’s not usually considered to be a real big deal, if somebody wants to do that. On the other hand, you get into day trading, and that being labeled that way, and most advisors are not real favorable on that. Mainly because we’ve all seen what normally ends up happening with people, when they go down that path.
Usually, the results are not real great. As a Christian, Steven, I would even add to the normal caution there, that day trading tends to become a very consuming activity. It tends to consume your attention, your focus, and it just — I don’t really know how to describe it exactly, other than to point back to Jesus, who basically said, you can’t serve God and money and for some reason, he pointed out money as that chief other adversary for our affection. I’ve seen that a lot with people who embrace day trading. It just really, or futures trading, other really involved forms of trading the market, it can become very consuming.
That doesn’t necessarily mean it’s going to happen to you, it’s just seeing that as a pattern. I would be very, very careful with that. Now that said, you’d certainly can carve out a piece of a portfolio and do some trading with that. I would just caution you in that area.
Rob West: I completely agree, Mark. I think that’s great counsel. I would say, Steven, as a steward, and that’s what you are, a manager of what is actually the Lord’s, I think after we consider our financial goals, we got to run it through biblical principles as a filter. I think when we look at investing, there’s nothing about investing that should be get rich quick. In fact, the Bible speaks very clearly against that. The principles around investing are for the long term.
When we begin to try to play the market, because no one can know where the market’s going on a day-to-day basis, I think we’re beginning to borderline and step into gambling. As a manager of God’s resources, I would just stay away. The only caveat would be for a professional investor. The vast majority of folks that are wanting to do this are not in that category. It’s a great question, though, we appreciate so much you asking today.
Mark, before we let you go, just a quick question today. We had a caller earlier that wanted to know about managing money while they were in retirement. I’m just curious, a lot of folks will say, take the amount you’re pulling out of any particular investment account that was earmarked for retirement, like an IRA or A 401(k), and move a couple of year’s worth of the money you plan to draw out, move that to cash, so that if we went through one of these difficult periods like the article referenced, that you wouldn’t have to liquidate anything, you’ve already got that cash set aside. Then implement your diversified investment strategy on the rest.
What are your thoughts on that?
Mark Biller: Yeah. I like that idea, that bucket approach, Rob, especially in a market environment like we’re in right now, where stock prices seem very elevated. The likelihood of a down period for the market, sometime in the next say, three to five years, seems very likely. And, bonds and cash, those safe investments, really aren’t earning all that much right now anyway.
I do like the idea of having at least a couple of years, maybe even two to three, depending on the size of somebody’s portfolio, of cash there, so that they don’t have to be selling from their stock investments into the teeth of a bear market.
Yeah, I think that’s a pretty sound idea.
Rob West: Excellent. Mark, always a joy to have you with us each month. We’ll look forward to having you back next month. Steve, I think they can read this article on 3D investing right there on the website of Sound Mind Investing, right?
Steve Moore: Yeah, I hope so. It’s soundmindinvesting.org. It’s a subscription newsletter. Mark, because you’re a generous guy, at least in the past, you’ve always made these articles available to our MoneyWise listeners. Can that happen this month as well?
Mark Biller: Absolutely. In fact, it’s right there, they can click on that immediately and see that article in its entirety.
Steve Moore: Cool. Is your picture right next to it, so people can find it easily?
Mark Biller: I don’t know about the picture making it easy to find, but hopefully the title will make it easy to find, yeah.
Rob West: 3D. Put on some glasses and read this article, this 3D article. It’ll change your life. Soundmindinvesting.org. Mark, God bless you and your family, and we’ll talk again in a couple of weeks, all right?
Mark Biller: Thanks, guys.
