Back to the Future: What the Last Three Years of Investing Have Taught Us

Well, hello everybody and welcome. Thank you for joining us for today's webcast, Back to the Future. I'm Mark Gochnour, Head of Global Client Services, and I'm joined today by Jake DeKinder, Head of Client Communications. So Jake, we have a lot to talk about, let's dive into it. And let me just kinda reflect on this particular webcast series, The Investor Webcast. We talk a lot about we want to make the best decision as we can as an investor, and what can we do to put the odds in our favor over time? Yeah, I think you're right about that. One of the things we've covered in the last three years and we'll touch on today is, you wanna have a framework to help organize your thoughts around investing. And that should be based on logic and on good economic theory. You wanna have data to back that up, and then you wanna be able to apply that framework and stay disciplined through all market conditions. And those ideas will carry through this broadcast, and really I think have been a hallmark of everything that we've covered in the Investor Experience webcast, and the way that I think Dimensional thinks about the world. Well I love that the point of the framework concept. So let's talk about the agenda real quick here. So let's connect it to the idea back to the future. So what we're gonna do here today is we wanna create the framework for conversations we're gonna have as investors as we go throughout the rest of the year. And that's really what's important as investors into the future. We wanna have the framework to talk about what's coming our way with inflation, interest rates, recession, debt ceilings, things of that manner. Now to do that, we wanna go back in time and reflect on some of the webcasts we've done the last three years or so, highlight some of those key themes, highlight what we talked about, and then take a look at what were some of the outcomes from there, because that is what we're gonna use to create this framework you just talked about there Jake. So let's get into it here. And let's go back to the very first one we did in March of 2020. Now what we're gonna look at on this slide, we wanna set some of these major themes up over time. And to do that we wanna look at the growth of a dollar. in the US market, we'll define that as a Russell 3000 here. So you see that one on the left hand side there, let's just assume that's a million bucks we had the beginning of 2020. And as I mentioned, the first one we did here was in March, that was a couple weeks into the pandemic, and this was the headline, Jake, that we were facing at that time. This one about the virus is gonna batter the economy. Now a couple things I'm gonna highlight here. "The Dow posts the worst day since 1987." So this was coming off the day before where, I think the return was about 9.5% or 10% down the day before we did our first webcast. But it is always good to reflect on how many times we have heard and we'll always hear the first time sense, the best time sense, things like that. It's a good thing to remember as an investor. The media is going to latch onto this idea of the largest, the fastest, the first, the smallest, the biggest, whatever it may be 'cause that helps sell articles and help sell publications. But as an investor you are going to encounter that article in some form all the time out into the future. So certainly helpful for us to remember. A couple other points that we hit on in that broadcast, Mark is, one, information is incorporated into prices incredibly fast. You touched on the fact that you're up 10%, you're down 9%, whatever it may be kind of day to day. When you were going through that environment, if you didn't see volatility in stock prices with new information being incorporated, you would almost think that something was wrong with the market. So that's another important point to remember there. The other thing to touch on and we saw this is that, it is amazing how fast things can turn and how there's rarely good news at the bottom of the market. And we've talked about that a lot. People will say, Hey, I'm just waiting for something to look a little bit better. The news rarely looks good at the market, and that was certainly the case back in 2020. No question, and I'm just gonna highlight 2/19/87, that day was down 23%. Just imagine that in one day. But I like the way you say that hey, at the bottom of the market, things looked the most bleak. And so let's just take a look at what happened from that webcast that we did here where you see that, it'll be the the quickest rebound we've ever seen over that time period. But it was a good comment you made there because that rebound we saw was during some very concerning economic news. You know, with unemployment popping around 14% or so, a lot of concerns with what that might mean for lockdowns and the future economy. But let's go back to your point there about the forward looking nature of markets. Which is, what's gonna drive prices in the future? Is if the news is better than what's priced in today, we'll get an increase in prices, if it's worse, we're gonna see a decline in prices? But whatever reason we're worried about today somewhere is in there. We saw this really quick rebound there in the market and that gets us to the next webcast we did, which is around this idea of value and growth, because then we are getting a different type of question. It wasn't, man what's gonna happen, this market's crazy with this unknown pandemic coming? But it was now about, we're seeing some really different things between the relationship and value and growth stocks than what we've seen historically. Just 'cause the market recovered quickly doesn't mean that all stocks are gonna recover the same way. And we've seen that through time. Different parts of the market and different types of stocks are gonna perform differently. At the time we started to get a lot of questions about value versus growth. And by the way, here at Dimensional we've gotten those types of questions decade after decade. 'Cause you will hit periods where value stocks will not outperform growth, and that was definitely one that we saw back then. Now the interesting thing is, in terms of the magnitude of what we saw. Over on the left-hand side of this screen, what you're looking at is you're looking at the long-term performance of value stocks versus gross stocks. When you hear anybody talk about the value premium, and you'll hear that from Dimensional, you're hearing that from your financial advisor, that's what we're talking about. Long-term difference, value stocks have had higher returns than gross stocks. But we hit this three-year period, July of 2017 through June of 2020 where our realized returns, what we actually got as an investor did not conform to our expectations. So the questions start popping up there. Now I wanna come back to why at the time did we say we believe, that day, when we did the broadcast, and every day at Dimensional value stocks should do better than growth? One, you've got the data to support it. Just looking at this screen, on the left hand side, I've got 96 years of data. Then I hit a three-year period where it doesn't necessarily look like what I expect. I don't see how you sort of throw 96 years out just because I hit a bad run there in value stocks. So the data kind of supports, yep, I still think that there's gonna be this value premium. But let's come back to the framework, the theory, the intuition behind that. And Mark, I'll give you a couple of choices here. So I wanna give you stock A, or really investment A, we won't even say stock, I'll give you investment A and I'll give you investment B. Now, at some point out in the future, you think you're gonna get some cash flow from that investment, and in both cases you're gonna walk away with $100, okay? Now in A, the price that you pay in the first one, you pay $25, in the second one you pay $50. Between these two choices, in which one do you get a higher return? A. Much lower price for the same level of cash flows. It's a lower price for the same level of cash flows. And when we talk about value investing, that's what we're talking, and we're talking about low relative price stocks compared to others' growth within the market. We've seen the data support it. Now Mark, let me ask you this though, why would it be $25 versus $50 for those two? 'Cause I'm gonna get the same cash supposedly out in the future, why is it $25 versus $50? Well there's something concerning about that particular investment, the reliability, the uncertainty around those cash flows. Now it can be a lot of different things, it's hard to always narrow down to this one thing, and we talk about that as the risk side of an investment. But there's something out there that's causing that to be a lower price to get those same cash flows. And that's the point there is that, there's some uncertainty that is associated with it. No one would go out there and say, yeah, I'll pay $50 instead of $25 if it had the same uncertainty that was associated with it. And by the way, this principle in terms of price that you're paying, what you expect to receive, and what you expect to earn on that, that is so fundamental to almost every part of finance. And you can take it back to very simple examples. Well, and we're getting that question back in that time period you just highlighted, that three years of, well is it broken, does it make sense anymore? And you go back to that economic tuition of, is it broken? So let's use an example you're just highlighting there, that when we found really effective with this idea of kind of a value versus growth, your point about there's some sort of risk embedded in a cash flow stream. So let's say we're going to a bank. We're both gonna go get a mortgage. And you have fantastic credit, which I'm sure you and Jay do. And then me, let's just say I have bad credit. Okay, so we go to the bank, now are we going to get the same interest rate? We are not. We're gonna get a different interest rate. You're gonna get a much lower interest rate, reflecting the quality of a borrower you are. I'm a more risky borrower, I'm gonna have to pay a higher interest rate. And that is just a basic economic story that applies to all investments, and that's effectively what you're highlighting here, there's something embedded in that return series, that price, that reflects some level of risk. That's exactly right. And so you say, all right, I had the data, 96 years versus three years, I'm gonna go more towards the 96 years. I have the sound economic theory, from that webcast from there, what did we see as we went through the rest of that year and on into subsequent years? Well, you actually see value stocks substantially outperform growth stocks. We said earlier that the market can turn on a dime and you just don't know when it's going to happen. That same idea can happen when you're a value investor, a small cap investor, you just don't know when you're going to see these pops. And the sad part is, when you adjust your expectations, if you went away from a sound economic theory and what the long-term data told you, you could have gotten whipsawed an experience and really missed out on that return. Yep, absolutely. And that through your time period in the middle there, that was the worst three years that we had seen there. So we're hearing that as well, and got people a little nervous, but you gotta stay in your seat to get those good returns. And then if we keep going with that in the marketplace, let's go back to our timeline here, what else was doing really well? Well we were starting to get a lot of questions around these big tech type companies, we called them FANG stocks. You know the Facebooks, the Apples, Googles and those. And they were kind of embedded in those growth numbers you were just highlighting there that was doing really well. The questions we were getting at this time now, when we're looking at that top stock timetable is, yeah, but is this gonna persist? Meaning these are such big well run companies, should I just get a lot more money in these things because they're just so dominant, I want those good returns into the future. The narrative that was out there was they're gonna continue to dominate in the future, how would you not have a much more substantial part of your money in there? And really what it was is, a little bit of performance chasing. It was here's the stuff that's done really well, now people start to ask questions of, is it different this time? Is value broken? Do tech stocks dominate? And again, let's come back to, I'll say a nice theory and the data around what we've seen with the largest stocks. Now you think about this, if you are going to be one of the big stocks in the market, you make up a larger part of the market, what's the only way that you become one of those big stocks? You gotta have great performance. For probably a fairly long period of time. And your price is going to go up, and we'll come back to that, when your price goes up, what happens to your expect return? It's gonna go down. Let's put some data to that. So what we're looking at right here is we're actually gonna take a look at the largest stocks and their performance before they become those big stocks, and then after they become those big stocks. Left hand side, this is the 10 years, five years and three years leading up to it. And again, by definition, you would have to have very strong returns relative to the rest of the market. And again, we're looking at relative to the rest of the market here, you'd have to have those strong returns to become one of the big stocks. The way you do that is your price goes up. We just talked about a minute ago that a lower price means a higher expected return. So if my price is going up, my expected return is probably going down. So what do we see with the returns after they become those big stocks? Well, you start to see returns three, five and 10 years out that look in line with the market. Remember these returns are relative to the market, and you have to ask the question, would that really surprise you? Again, if I know that there's a relation between price and expected return, I don't know if these results should really surprise me. And I just wanna emphasize that point. These are relative to the market. So if I look at that 10-year number, go ahead and circle that 11% Jake. 'Cause we're gonna come back to that in a moment. So that's saying they over that 10-year time period, they did 11% better than the market. So if the market was up 10% over the 10 years, they were up 21% annualized. Annualized. If you look at that first yellow bar there, that 0.7, go ahead and circle that one. So that's saying, hey, after the three years they were up 0.7%. So if the market was up 10%, they would've been up 10.7% annualized. So I just wanna make that clear, this is above and beyond market returns. Good clarification on that, and that's an important point, above and beyond market returns. Okay, so let's go back to your point of, hey there was this narrative out there, tech stocks were doing well, and let's use the FANG acronym to take a look at this, very well known at that time period, we were getting a lot of questions. And what did you see in the 10 years leading up to the end of the last decade? Well this is January of '10 through December of 2019. Here's the return in excess of the market for those FANG stocks. Circle 11.3%. Now we'll test the audience. What number did Jake just circle a moment ago? 11.3%. Now this is crazy how exact the number this is, 'cause I'm an accountant, and anytime you see the numbers identical, big red flag, you gotta go make sure you got your numbers right. And we've tested it with our research group, these numbers are right. So I just wanna be very clear here. We just looked at historical data that said, hey, once a company becomes a big company, those 10 years before they were 11%, 11.3% better than the market annualized. These FANG stocks, as they became those big companies, they were 11.3%, like it's crazy, they're identical numbers. It's kind of interesting how it shakes out there. But again, if you come back to, it was a sound theory, relation between price and expected return, and I had data to back it up, I agree with you, the 11.3% is crazy. But the fact that it is relatively close or if it's shook out a little bit different, I don't know if we should be surprised by that. Let's take it one step further and say okay, now let's start in January, 2020, and say what did we see over these last three years with the FANG stocks relative to the market? And what you saw is over this three-year period right here, you saw that they had an excess return of about 0.9%. And what was the return on the historical data... It was 0.7%. 0.7. So really, really amazing, we're not that good at predicting, I can tell you that. But nonetheless, interesting story. Very interesting. I just like when I come to your office, and I'm like, you gotta see these numbers, you're never even gonna believe these numbers here. But you know, let's break it down just a little bit further of what was taking place, and people are probably a little bit familiar of what took place in 2020 with the FANG stocks. And that's what we're looking at right here. And I like this chart. This is not a chart to beat up on tech stocks or large growth stocks, whatever that may be. I just like looking at this because again, even with the large stocks, what can you see? You can see a dispersion in returns, and we've seen that historically with all types of stocks. You know you look at Apple right here, that's actually relatively in line with the market, the market was down about 18%-20% last year, and Apple's down a little bit more. But then you go all the way down to Facebook, or Meta and Netflix, and huge, huge divergence. Another good example of, you wanna be careful chasing good performance and you wanna be careful concentrating a substantial amount in a handful of stocks. Yeah, a lot of people tend to see, well these FANG stocks, they all moved together. Clearly they don't, they look very different, and we're seeing that this year as well. Meta had an incredible day a week or so ago and then the other ones are kind of market level there. So you see this difference is in returns. But I go back to as a diversified investor, you're getting these returns, you got those fantastic returns for those 10 years, and that's really the good news story is. It shouldn't be so much, hey I have to go and weigh overload and load up on them. It's always getting my portfolio, you can feel good about that. I always come back to that point as well. It's just remember in a broadly diversified portfolio, if you're hearing about a stock that does well, you don't need to have the FOMO, you probably got it inside of your portfolio. Yep. Okay, now these were doing very well though over that time period. Let's look at what else was doing really well as we go back to then some of these webcasts we've done. And these are some questions we're getting about crypto in a pretty serious way. So let's go look at the historical price of crypto. Now this goes back to 2010 when Bitcoin, in this case will be the example we'll use started up there. And you can see what that price is over time. Now Jake, I wanted you to put an X. We did that webcast, it's September of 2021, the best you can find it on there. And that was about $50,000, was a Bitcoin, when we did that webcast right in there. Now were we getting a lot of questions in early 2020 on Bitcoin. No, it was about $10,000 per Bitcoin. You always sort of get this stuff after it's done really well. So we did a webcast, looking at Bitcoin specifically. And I'll just make one comment here, you look at how volatile that price has been sort of the last couple years, we saw that volatility in the early years as well. It looks really flat over that time period, but it was just as as volatile, and we got another chart we can look at to see what that would've looked like over some of these huge ups and downs with Bitcoin. Well, you brought up a great point there of, we get the questions when things have done really well. In early 2020, we weren't getting a ton of questions about it. You know when we started to get it? Right when you see this massive spike up. But with the massive spikes up, we've also seen massive spikes down. And in fact you can take a look at that volatility that we really wanted people to understand in that broadcast. Really all the way back through time you see drops here of 36%, 80%, 50%. The most recent one from its high back in 2021 was down over 75%. It's an incredibly volatile investment, at least from what we've seen at this point with Bitcoin. Well I got some numbers for you, if you don't mind writing these down. So you talked about how volatile it was. Over time, since Bitcoin has been around, it's been down 20%, meaning from peak to trough, 20%, 17 times since 2010. Now, you compare that to the market, and the market has been down four times down 20% from peak to trough. And are we measuring that with S&P, Russell 3000? That's Russell 3000. Okay, Russell, just wanna make sure that we're cool. Yep, that's the Russell 3. Okay, and how many times was it down from -20%? Four. Four, okay. Since 2010. Since 2010, good. Okay now, you just highlighted a 70%. So let's look at the number of times Bitcoin has been down over 70%. Five times. Now that's a lot of big ups too, but five times down over 70% and zero times for the Russell three down over 70%. So we've seen some serious volatility with that. But the questions we are getting then were okay, but does it fit in my portfolio? You're seeing this great performance, it's in the headlines. A lot of investors were saying, hey, maybe this should be a standard part of my overall investment portfolio. So let's have a conversation around that, because I think it's incredibly important to think through, you go back to your time framework, what's the framework to think about an investment, any investment, if it's something that I should bring into my portfolio and own it. So let's walk through those four things here. So Jake, number one, what's always the most important thing you start with? When you're gonna put a substantial amount of money into something that's gonna be meaningful for your future, I think you have to establish what is the goal of that investment in my portfolio. What's the goal? It could be, hey, for growth, it could be for stability, it could be cash. Second question, what's my expected return? And I think about that when, oh okay, well stocks, we got 90+ years of data there to suggest it's somewhere around 10% is a reasonable expectation for stocks over the long haul. But how do I think about Bitcoin in that case, or any crypto, they don't make anything. There's no earning stream from that. Is it cash? What's the expected return on cash? Zero. Zero roughly, yeah. Well, and I like the point you make too about when advisors are out there doing modeling and thinking through through various scenarios, you have to put some inputs in. And I don't know what to put in for something that has no cash flows or earnings. It's a tough thing to do, and I love the fact that you brought it back to when you're working with a financial advisor, 'cause these first two things that you highlighted, you're going to work together to establish the goal. What am I trying to accomplish financially? What does money mean to me in my life, and what am I trying to do? Okay, so now what's the goal of the portion of my money going into that? And then to your point, you have to be able to say, hey, we have to have some expectation of what we think we're gonna earn, if we're actually gonna be able to reach that goal. Be able to send our kids to college, to do all of those things. So you've got, what's the goal? You've got what's the expected return? And with anything around investing, Mark, you have to really think about, what's the risk that's associated with it. And back in 2021 when we were doing some of these broadcasts, we highlighted some of the risks, potential risks around crypto. Yep, regulatory risk was one, safety was a big one we talked about, you're seeing a bunch of hacks taking place over that various time period. Volatility is one that we've talked about as well. And what was the last one? I know there's one more in my mind. You've got- Regulatory, safety, volatility. You've got regulatory, you've got safety, you've got volatility, you've got competition. That's one with a lot of us. We saw an interesting note the other day about, 22,000 cryptocurrencies that are currently out there right now. Some of them likely will be around for a while, but you don't necessarily know which ones will be around for a while. So there's just all of these risks that are associated with it. And again, you think about the way that it played out since we did that broadcast, and the headlines that many of our investors, or sorry, many of the people investors on this broadcast have read, it's pretty remarkable the way that it shook out. And then of course the last one is what we do all day in our lives, anything we buy something, what's the cost? There's a transaction cost to go capture any kind of a cryptocurrency to buy and sell it. There's a tax cost, I always like to highlight that one, because there's so much out there at the time when it was at a high price of, hey I can go buy a new car, a Tesla or something with my Bitcoin. Well if you were to exchange a Bitcoin for a Tesla, the government wants our money, right? They consider that a capital gain, a taxable event. So there's a tax cost when you swap crypto out for a product. So last thing that it cost, and you always like to talk about the opportunity cost. I think the opportunity cost is big and most people that I meet don't have unlimited money, which means that if I'm gonna put a substantial amount of my wealth in some other investment, it has to be pulled from something. So am I gonna pull it from my stocks, from my bonds, from cash that I'm holding for short term spending needs, major opportunity costs you always have to think about with investing. And I like what you said earlier, of we use Bitcoin or cryptocurrencies as an example with this framework. This framework can apply to any type of investment that you wanna think about into the future. And we said, yeah, if you could walk through, and say, yep, I've got a reason for these four things, or I can explain these four things and I think that a Bitcoin or crypto belongs in my portfolio, there's nothing wrong with that. And I would come back and say, if you're doing that when it was a $60,000 Bitcoin, now it's a 22, maybe it still belongs in your portfolio, don't abandon it just because it went from 60 to 22 if it still meets those criteria. I love the way that you framed that because again, we remember the discussions that were taking place on the way up and everybody was really excited about it. People probably aren't as excited about it now. Maybe they are, I mean it's come back a little bit this year, but again, it should be independent of, it's done well recently. Can I logically answer these four questions right here before I put substantial wealth in there? Okay, so great framework for any investment you think about. Now let's go back to again our growth of a dollar over time. There we see where at crypto there in 2021. Now things are just sort of bumping along and now we're going into 2022 and inflation was a super big question we got about, well how do I think about inflation? And I love the way you always talk about it to say, you wanna sort of separate the concerns of inflation as a consumer versus a true investor. Because as a consumer you see it real time in the gas pump. You know you buy Chipotle, you see at the prices there, and it's real. But the problem with that is it's backward looking. It's always a year over year measure in the past. As an investor, what do we care about? Looking into the future. So let's take a look to say is there anything about inflation that tells us something about how our investments may perform into the future? So let's go back in time, here's just something we're looking at over 30 years. The green bars represent the return of the S&P 500 over each calendar year. Now I just wanna highlight these are real returns. So it's going to be the return minus inflation. That's what we're looking at here. And then these little yellow lollipops that we like to call them, that's what inflation was for that year. Now that year means year over year, that 12-month change. Okay, quick question, is there any patterns you see with inflation in what's going on in the market? You don't really see it, but let me highlight 2021 on this chart here. I think inflation that year was 7%. So again, that was the full year over year inflation is 7%. And then the S&P was up about 22% real return that year. Now the question though, and it's a very good question is, yeah, but all those years were pretty low inflation. Let's look at another time period where inflation was much, much higher. To do that, let's go back to the 1970s, early 1980s. That's what we're looking at here. It's the exact same chart, those bars are the return of the S&P 500, again, real return, so it's the return minus inflation. And you see a pattern here. I would say no, so let's highlight a couple years. 1974. So here's a number for you Jake. Inflation in 1974 was up 12.3%. And the S&P was down 37%. And again, that's a real return after inflation. How about 1980? Interestingly enough, very similar number, inflation was 12.5%, yet the S&P was up 18%. So you don't necessarily see any indication that says this year means something about the return of the market that year. Now let's just wrap up this conversation here, let's just go to 2022. So out if you're able to, you got any room left, there on the right hand side, but let's draw a little lollipop if you're to- You're gonna make me draw a lollipop, I'm gonna do my best here. Do a little lollipop, that's pretty good, because it was 6.5%. Okay 6.5? Yeah. Now what was the S&P last year? Down. Down real return 25%. Down 25%. You just looked at 2021 and 2022, very similar inflation, one was a very good year, one was a tough year. My take on that is, is inflation important? Absolutely. Does it impact our returns? It does. But what else does? A million of other factors. Million of factors, absolutely right. So it's just hard as much as we're wired to mentally to say, this one factor will mean this on my returns, it's just there's hundreds if not thousands or millions of factors impacting our stock returns. It's what you come back to, right? What's the logical framework? We know that market prices incorporate all different types of information. Inflation's one of them, but so are millions of other factors. What's the data telling me? Historically I can't, at least over the short term, see any pattern between inflation does X and stocks are gonna do Y. It's just that consistent theme of, what's the framework, what's the data? Yep. Okay. Should we go back? Keep on going. Here we go. Inflation, now what happened? Elections. Very polarizing for a lot of people, we are getting quite a few questions of, what will this mean for the market depending on who takes control of Congress, the House, the Senate, and how do we think about elections and our returns as an investor. Now similar to the consumer with inflation, politics, voting, incredibly important. Incredibly personal, you should care a lot about it, you should go vote, take action, absolutely. But just sort of separate that from your investments. Don't vote politics with your investments. So what have we learned about time over that? So what have we learned about time on this? So we'll take you back to last year, midterm election years. What you're looking at right here is this is if we go back and we look at all of those midterm election years going back to 1926, that by the way is when we can get data on the S&P, that's the reason we're starting back in '26. You see some negative returns, you see some positive returns. People had questions on how, it shook out in different type of midterm election years. Now you just made a comment about as an investor, we want to be forward looking. We did this broadcast on September 30th, the end of Q3 of last year, beginning of Q4. So we asked the question kind of, how have Q4 returns been in midterm election years? Here's what you saw in terms of the average Q4, return was 6.5%. You got another one that just sort of jumps out to you as an accountant, Mark. What did we actually get for the actual return? Actual Q4 last year was 7.6%. Q4 2022... So oddly oddly really close. 7.4, or 7.6, what was it? 7.6. 7.6% right there. So now listen, we also have to be very honest here, of that one, we kind of got lucky on, you know, you go a little further, this is the average return in midterm election years. That was not the return for the S&P 500 last year. S&P was down 18%. It's in the range we had on there. I wish it was a positive 18, not a negative 18 in the range, but we nailed the fourth quarter, not so close on the annual. But again, it's that same idea of look, here's what the data tells me, I actually don't have too many data points around election years there, but again, just like you talked about inflation, a million things impact stock prices. Who's in control of congress? Who's the president? Who's in charge of other countries around the world? Is that factored into stock prices? Yep. Along with tons of other stuff. All right, so that brings us to where we are today. Jake, let me just touch on a couple questions, and it's a great timing y'all, thanks to the one about recessions, we're gonna dive into that here in a moment. There was a question here about what is the top 10? Now thanks for that question because we should have defined that a little bit better. A top 10 stock is a company whose market capitalization made it one of the 10 highest market cap stocks in the US. So we say a top stock at the beginning of the decade it went to, sorry, I should say at the end of the decade, it was one of the top 10 most valuable companies in the US based on market capitalization, which is its size times market or sorry, shares outstanding times market price. Well, and I appreciate that. And that's on us, we need to make sure we always clarify. I always when I'm speaking to investors, they listen, you're gonna hear this term capitalization, just realize two inputs, shares outstanding, times market price. That is important though because remember what we said, the price is gonna go up, when the price is gonna go up, the market cap's gonna go up. But when the price goes up, the expected return goes down. Okay, thanks for that. And then what about crypto, if you were to invest in it, what's a reasonable percentage of your portfolio? Great way to get with your advisor on that one. Understand what you're trying to accomplish, kinda goes back to the goals, what else you're thinking about there. And then what are you comfortable with from a speculator perspective, if that's the direction you go on that as well. So that's something that'll be a great conversation with your advisor. Okay, now again, Alan had a question on recessions. Let's work our way into that, 'cause that's one of the things that's top of mind for live investors. Why don't we start with another thing top of mind. Let's go back to then interest rates. Interest rates for sure. I think 2022 was a year where some were, I'll say maybe a little bit surprised. I mean there's no sugarcoating, for the bond market, it was a rough year for the bond market. And what happened? Well, rates went up. When rates go up, what happens to the price of bonds? Go down. They're gonna go down. So let's break this down on where we were, where we're at and what we can think about into the future. So you know, you go back and you think about fixed income over the last, really more than even a handful of years. We've been in this lower rate environment all the way out to longer maturity bonds. And so you're kind of at a, I'll say you're moving out into the future but you're moving out into a future in a relatively low rate environment. Now we hit last year, you just told me that when rates go up, prices go down. So this is what happened to the price of a lot of bonds and bond funds that are out there. So you kind of had this, I'll call it a little bit of more short term pain. I'm looking at my statement, I see a loss, maybe I thought the bonds were supposed to be a little bit less volatile, hold up a little bit better and yet I'm down in my bonds. Alright, well what does that mean for me going forward? So I went down in terms of my price today, but what also happened when rates went up? My opportunity out into the future actually changed. So rather than the slope that we had before, I'm actually seeing this potential that as I move out towards whatever future date I may sell that bond fund, I could be actually a little bit better off. Now again, this right here, this is if we sell today. And to me that's important, we actually were in Charlotte last week. We were having this conversation with a number of financial advisors and just asking them questions about their clients' bond portfolios. And you know, I asked them, I said, hey, when you put someone in a bond fund, how long do you have them in that fund for? And again, there's no definitive but, the initial response was a long time. And then a lot of people started to say, I don't know, 10, 15, maybe 20 years, they're gonna be invested in this bond fund. And then the next question I asked them was, well hey, what's the, we'll call it duration, 'cause that's the official term, of what's the duration of your bond fund? You can just think about that as what's kind of the average maturity of the bonds that happen to be inside of your bond fund. And a lot of the advisors said, I don't know, around five, maybe six, maybe seven years. The reason that that matters for us is, in this current environment, we've seen a drop in our bond portfolio, but where we're ultimately gonna get to in the future actually could be a little bit better off. And as long as for how long you plan to hold that bond fund is longer than that duration or average maturity of the bond's in there, you're actually gonna be okay as an investor, you're actually gonna start to move up into this area up here. And this is if we hold that bond fund out into the future past this point, which is that average maturity of our bond. So this actually is a great opportunity to get with your financial advisor as well and have a conversation to say, Hey, I've seen some of the paper losses. Help me understand kind of what we're invested in around fixed income, maybe how long we're thinking about holding that bond fund. And really it's a new environment where things could look good out in the future for fixed income investors. Yep. And again, we went through some of those prior webcasts just to think through some of the concepts out there that could help us go into 2023. One of them you just talked about lower price, means higher expected returns. And that's kind of what I'm taking from your drawing here into the future. The other thing we talked about, what's the ability to predict the future. There isn't any, whether it's what's gonna happen in the stock market or what's gonna happen with interest rates as well. There's not, I mean this by the way is there's plenty of data that backs this up. But this again, it's a framework to think about, okay, I saw a paper loss but if I'm not really selling that bond fund, am I really that concerned if I've got greater opportunity out in the future? We talk all the time about like the price of your house. I mean you can't look up the price of your house every single day, but even if you could, if you're not selling your house or 10 or 15 years, do you really care it goes up or down a little bit in value? Probably not 'cause you're like, I'm living here, I'm holding it down into the future. Great example on that one. Now what are some other questions we've been getting into the future? Now this one's really interesting, let's go back to the value versus growth. A couple years ago, we're getting the question, well, have things changed? This is this economic story between value and growth still hold. Now we're getting a little bit different questions because we looked at the returns of value and it's been so strong the last couple years. Some of the questions come in is well, can that persist into the future? Can you have that big of a return difference and then still have value outperform growth going forward? So let's address that one here on that. Which is kind of interesting to see the two different questions, how fast that can change over a couple years. Completely, so let's take a look at what we've got right here. So you're looking at calendar year returns or calendar year premiums here for value versus growth from low on the left hand side all the way up to high on the right hand side. Now what I'm gonna show you on this next chart is that, based on that calendar year, how does value then do in the next year moving forward? I see quite frankly a fair amount of randomness there. I can't really draw a definitive conclusion that hey, if I'm down in this part of the chart, then when I look at that future year down below, I'm gonna be able to distinguish some pattern. And by the way that goes for the top end of the chart, as well up here where I look there and say, hey, when value stocks do really well, can I look out into the future and say, yeah, they did well but there's not really not much left in the tank. I don't think they're gonna do that well out into the future. No, you can't. I think about it like this, if you went out and you flipped a coin 10 times in a row and you got 10 heads, what would most people think? What has to come up on the 11th time? They're gonna say it's gotta be tails on the 11th one. But the coin has absolutely no memory, it's independent. And so we have to think about that the same way that, just because we've seen value stocks do well, doesn't mean they're not going to do well in the future. The data supports it, and come back to the theory. What's a value stock? A value stock at the beginning of last year was a low price stock. A value stock at this year is a low price stock. There is a relation between price and expected return. I've got the data supported, I've got the framework, regardless of how value did last year. Well that actually is a great summary. A question came in Jake that said, okay that worked for the first 96 years where value outperformed growth, but wouldn't it be a reason to expect growth to outperform value in the next 96 years if everything sort of normalizes over time? And I think you just answered that question really well, is to say, but that's the economic story of why you expect value to outperform growth over time, is they are lower price securities, thus having a higher expected return. But anything can happen in the short run. But I liked what you said there, and we talked about this on the previous webcast is, every day we expect a positive value premium. Just like we expect a positive return on the market every single day, that's that pricing structure of the marketplace to give you that daily confidence. Well, and we don't wanna get too into the details here, but you brought up a great point when we were chatting this morning, just that reminder of, hey, when value stocks do well, their price goes up. When their price goes up, you know what they start to become potentially? Growth stocks. You know what you do inside of a value fund? You sell them out of a value fund and you rotate back into value stocks. And you know what those are? Those are the low price stocks. You're kind of like you're capturing the returns when value does well and then you're rotating back into new low price stocks. Yeah, all those stocks had just did great the last few years, not all of them are still in the portfolio. Some we've sold off, again 'cause we have that daily process unlike an index fund that does it once a year. Got that plug in. Okay, let's keep going here. All right, another one that's top of mind, so we've touched on their interest rates, touched a little bit on the value growth. Let's go back to inflation, 'cause it's still real and we're still getting quite a few questions about it. Let's come back to what we talked about earlier and we're gonna keep it real simple. You just start to think about, we've got inflation here, it's coming down a little bit year over year by the way. It's not necessarily mean prices are going back down, just year over year inflation's coming down. But when I put on my investor hat, just come back to that first question, what's the goal? I'll give you two choices here, Mark. On one side we're gonna go down this path, and what is it gonna be? You can hedge it. You can hedge it. And we like to say, hedge the unexpected inflation. Hedge the unexpected inflation. There's a subset of people out there, I have short-term spending needs, I have identified it as my goal. I've got good tools to do that. But we want to use the right tools for the right job. Again, we were in Charlotte last week, we had some people bring up the idea of gold as an inflation hedge. We've heard cryptocurrency as an inflation hedge, other real assets. Just remember you want the right tool for the right job. Here's approximately what inflation looks like over time, here's what the price of gold and cryptocurrencies and other, you cannot hedge something that goes like this with something like this. If you want to accomplish it, get the right tool. Yeah, if you want to hedge, just gotta move in lockstep. And we found too that hedging, it's a very, I say individual or customized discussion. So get with the advisor, see what you might want to hedge if you have some of those risks. What we generally see with a lot of investors out there is not so much hedging, it's in our performance strategy. And what's the best way then to outperform inflation over time? Well let's look at some asset classes that have done that. Again, you just go back to the data around that. So we'll take a look quickly at this. We'll show you some stuff, and by the way, I always like to point out this is high inflation years, so we're gonna look at those above median inflation years. Nobody asked questions about inflation and low inflation years. Treasury bills, not a negative absolute return, just if my goal was to outpace, they failed to keep pace with inflation. That's what you're seeing with that negative return. Bonds, not great, but they did a little bit above and beyond inflation. Stocks, now we're talking, now maybe I've got the right tool and then subset of stocks, large growth and small value. It just comes back to don't get spooked as an investor by the inflation boogeyman. You have the right tools depending on what you wanna accomplish. Okay, so I wanna bring up some other subjects now and think through the gentleman's question, I'll ask a question there around recession. So I wanna do, put a couple different things in a bucket. So I want to talk about the debt ceiling, some of the concerns around that. Let's talk about recessions, let's talk about some of the tensions with China. Certainly what's happening with Russia and Ukraine. And to do that, I want to go back to another framework. Now, you did a really nice job of walking through, Hey, if I'm considering an investment, what is the framework to go through that? What are the four things that we need to think about for an investment if it belongs in my portfolio? Another framework I wanted to get into is, should I make a change? Now, there's two ways to think about this, the first one is, maybe some things have changed in your life circumstances, your goals, your objectives, different things like that. Get with your advisor on that one. If a change is needed, absolutely you can think through what that might look like, help you rethink what the scenarios are. But let's go back to outside of that, there's not a life change. It's, hey, I'm worried about, I'll say X, Y, Z, I'm worried about the debt ceiling, worried about recessions, whatever it is. Should I make a change in my portfolio because of those worries? And let me walk you through how I think about this scenario. I kinda like to go the concept of a decision tree. So I start out with the first question being, what information do I have? Meaning do I have information that nobody else has out there? So you think about information, the answer is, yes, I have information that nobody has, or no. So let's start with the yes. I have some information no one has. Now for me, in this case we're talking about publicly traded securities. So stocks and bonds. You might have some knowledge about your local community if you're into real estate, some things they're in publicly traded securities. If you have information that's not publicly available, you're an insider. And there's two ways to handle this. One is you're not allowed to trade on that information. If you do, I always joke, it's a risk return story. You can trade on it and make some money. You risk jail time or significant fines. For publicly traded securities, you're probably not gonna do much. It ends there if you have information no one else has. The other side of that is, no, I don't have any information. The stuff I'm worried about, I read in the Wall Street Journal, or I heard on the news, or my buddies are talking about it. If that's the case, what does that mean? It's in the price. It's in the price. Everybody has that. It's already reflected in the price. Okay. If that's the case, then I got two ways I can go with where I'm at. This concept of, should I make a change? You have one that goes down that says, you know what, I can't take it anymore. For whatever reason, I'm making a change. I'm gonna reallocate my assets away from say, stocks to cash. Okay, what is that for me? You're making a bet. You're making a decision on a very short term timeframe. And when you make a bet, I call it the hope strategy. Man, I really hope this works 'cause if it works, I win. If it doesn't work, I lose. And there's a tremendous amount of stress and anxiety that goes with that kind of a decision. Let's go the other route. And we've been using that word framework. Let's go ahead and write that one down there to say, you know what, I'm gonna go back to the framework that we've been talking through about an investor, a foundation to how to think about this stuff. If I have an advisor, I have a plan, I have data. 90 years plus data that supports what I'm thinking through. I've got an economic framework that supports what I'm thinking through. That allows me to stick with my plan and brings a discipline to the process that's required there. That's kind of how I think about all these questions out there in terms of, again, I'm worried about whatever it might be. Let's call it recessions. Let's call it this. If it's already in the price, there's not much you can do about it except make your short-term bet. And I like to think about making a better longer term decision there. I think that's what it's really about there. And I love you hit on that discipline part at the end there. I'm gonna add on to it. I'm gonna put a yes, no here. And I think that we all feel that we can remain disciplined and stick to our planned. And I think the reality is that as we look over the last three years or so, we've encountered a lot of different events, a lot of things that we've gone through as human beings and a lot of things that have tested our emotions. And sometimes that has carried over to investment decisions that people make. And so we hope that we can stay disciplined through any market condition. But I will have to say that time to time, I think people do lean towards that no side, especially without the help of a financial advisor and a financial professional. To put together the plan, to be objective, to put together the framework, to employ the framework, look at the data, all of those things. It can be hard to do it on your own, that's why we've built our business around working with advisors for decades now. Yep. And discipline is key, as we know. Let's take a look at this. There's some ways we can think through how well do those decisions, I say, manifest themself in real life? Let's look at some cash flows then of what we've seen in the investors of the last three years. Now here, let's just take a look at this slide again. This is now just the return of the Russell 3000 over that time period. Our million bucks, what would that have turned into, Jake, there over that three years? Oh, about 1.2, 1.3. So a million bucks over a very challenging three-year time period would've been a little over maybe 1.2 million. It's about a 7% annualized return, which for many investors, again, considering some of the pretty serious stuff we've been through, that works just fine for them on their longer term objectives and goals. Now, let's go back to, I'm gonna call it the hope strategy. And what do we see when we look at some of the actions of investors out there in the marketplace? And one way to do that is to look at what the cash flows have been into or out of stock-based mutual funds and ETFs. And that's what we're looking at on this yellow line here. If you can sort of draw at the beginning there, we're looking at the right side. That's a zero there. Where that starts out, that's just saying, at the beginning of this three-year time period, we're gonna see what investors were doing with their money. And that yellow line just shows how they were continually selling stocks in mutual funds and ETFs down to the tune at the bottom there of over, what, $400 billion. And then they started investing back in the market. Now, when did they start investing in the market? Well, after it already started going up. It kind of peaked there at the top, and then they started selling again. What I love about this chart is, the yellow line, and I shouldn't say I love it, it's sad, but I think what's incredibly effective here visually is that yellow line is just to the right of what the market's doing. Meaning there's a three to six-month delay. You're seeing investor behavior kick in after the market moved. They're selling after the market went down already and they're investing way after the market's gone up. This is the last thing you want to do as an investor. And in a perfect world, if you could time the market, that yellow line would start well before... Those sales would start well before you saw the market go down. And you just don't see that because there is no crystal ball. You can't predict the future. I look at this, Jake, and I say, okay, let's go back to that decision tree we were just looking at. I stick to my plan. I got a framework. To me, that's your green line, that's creating wealth. That's growing wealth. We have here on the title. The yellow line, sadly, that's destroying wealth. And that's where you see emotions get involved. You know, it comes back to what we've talked about. If you don't have the framework to organize your thoughts, if you don't understand the discipline and if you don't understand the data and you can't stay disciplined, sadly, that is what we've seen people go through and it just doesn't have to be that way. The capital markets will provide a good rate of return over time to investors that can really stay disciplined, understand the framework, understand the data, but it's not the easiest thing to do on your own. Again, one of the huge benefits of working with a financial professional. Yep. Great summary there. And I just kinda wrap it up here with the final comments of, going back to, what's the goal of these webcasts? It's to help investors make the best decisions they can that gives us all the highest odds of success. And that's what we see here on this cash flow side. Just stay invested, stick to your plan, get your advice from your advisor. They're invaluable in some of these different time periods to keep you disciplined. That's what gives you the highest chance of success. Don't be a yellow line. Just don't be a yellow line. You're gonna get T-shirts made that say, don't be yellow line? That's about right. You're right. That's a great summary there. We have, like I said, built our business around it, we believe so deeply in it. And what we covered to here, it was a review, but hopefully you can see how these frameworks will be just as applicable when we encounter the next one, three, five, 10, 20 years as investors. Yeah, the lessons we just have been through are just a great foundation for future market. With that, hey, thanks everybody for joining us. Hopefully that was just helpful to think through. Some of the things we all grow through as an investors, better chance of success, and lower emotions along the way. Appreciate you joining us here and have an absolutely fantastic rest of the day.