Riding the Wave: How the Smart Money is Investing in 2024

Well, welcome everybody. And thank you for joining us today for our webcast titled, "How the Smart Money is Investing in 2024." I'm Mark Gochnour, Head of Global Client Services, and I'm joined today by Jake DeKinder, Head of Client Communications. So Jake, good to have you in the studio. Always great to be here. Always great to be here to kick off a year. I'm looking forward to this broadcast, talking about 2024 and what we've got on the horizon. And this one, we're gonna have a lot of fun with. And I love the title, "How the Smart Money is Investing." Let's set up the conversation and go back one year. And let's take a look at some of the headlines we were reading back in early 2023. And there's a lot of articles like this being written, a lot of concern going forward into the year, a lot on investors' minds, things like the economy, a potential recession, dealing with higher inflation, geopolitical stuff, and then of course, the Fed. What are they gonna do with interest rates? You're coming off of 2022, you kick off 2023, there's some negative sentiment in the market, all these things that are on the horizon, inflation, potential recession, Fed, geopolitical events. And you can take a look at what a growth of wealth looks like over the course of that period. And listen, we even had events here that we didn't know were on the horizon. We hit March and we get the second largest bank failure in U.S. history, right? Concern about a banking crisis. You go forward throughout the year, the Fed's still on the radar here. Go to August, we get the U.S. credit downgrade, second time that that's ever happened. Ongoing conflicts and then a government shutdown, which seems like that's always kind of on the horizon here in the U.S. And listen, you're up over 20% for the year. Those are U.S. dollar returns here and we're looking for a growth of wealth globally. But listen, you also had a pretty decent decline right here and a pretty decent decline right there. That's what you have to manage through if you wanna capture those market rates of return. Yeah, choppy markets, which is pretty consistent year to year in any stock market, but overall very good returns for the year around the world. Let's now fast forward a year, take a look at some of the articles that we were reading throughout January. And it's kind of interesting to see how the gloom, the concern about the year changed to optimism. We look about here where future looks bright if you know where to look. Then of course, Jake, this is one of your favorites, get rich quick in Indian stocks. If we only knew it in advance, it would have been fantastic. I always love the get rich quick trade. I think Indian stocks are up over 20% last year. And you saw some institutions saying, hey, I'm gonna change my allocation from China over to India, which performance chasing, that's always a good investment strategy. Yeah, it's tough. All right, but you read these different articles and what you come across are some consistent themes. And one of them is this idea that, hey, there's some signals out there. There's some indicators that you can focus on and use them 'cause it'll tell you something about future market returns. And we're gonna dive into some of those here today. Well, you're right. And what are we hearing right now to kick off the year? I'm hearing a lot of chatter about US debt levels. We're hearing about growth for this year, GDP. Obviously, we've got an election coming up. So let's go in and let's take a look at a couple of those. We'll kick off with debt levels 'cause we know we're hearing about that, Mark. I think we've hit 34 trillion roughly. Just over 34 trillion, yep. That's a big number. And listen, you set this conversation up beautifully around this idea of what would we expect and what does the data say? Yeah, if we think X is gonna happen, what's gonna happen with Y in the stock market? $34 trillion, it's increasing quickly. Does that mean poor market performance going forward? I love the way that you think about that. Here's what I might expect to see. What does the data say? So let's take a look at debt levels. And on this chart, what we're looking at is we're comparing debt levels scaled by GDP here to stock market returns. Now, the expectation might be, hey, as debt levels go up, stock market returns are going to go down. Seems plausible. So you would expect to see a relation like this. And at some point, you're gonna get this crossover where the debt's gonna be so high, I'm gonna have negative returns in that country's stock market, okay? What does the data actually say? Really no relation here, except for there's one thing that jumps out on this chart. Mark, what is it? There are a ton of dots above the line meaning positive returns, even for some of those countries that have high debt. And that's what we see over time. Markets tend to go up more than they go down. If you look every month, every year, every 10-year period, and people might look at this chart and say, okay, that's interesting. I'm here in the U.S. What does the U.S. look like? Pretty darn similar to what we see for all of those other dots there. And listen, this is 2022. We had high debt levels, and we had a rough year in the stock market. 2023, we still had high debt levels, and we had a great year in the stock market. So somehow this idea that I can look at the level of debt as a percentage of GDP, and it's gonna tell me what's gonna happen in that country's stock market, not necessarily the strongest signal for investing. The last two years really highlight that well. It doesn't tell you what's gonna happen in the future. But one thing I do wanna highlight here too, are we concerned about the levels of debt? As a citizen, I absolutely am. I know you are as well, but it's a good reminder for us where it's okay to have those emotions around what's going on with the country, concerns about that, but just separate that. Don't let that influence the decisions you're making with your investments. Great point. Okay, you had highlighted on that chart, debt as a percentage of GDP. Let's start focusing a little bit on the economy and think about that in terms of percentage change of GDP. Oftentimes that's a good indicator of the strength of the economy. And you kind of phrased the same question. Does a strong economy mean strong returns in the future or poor growth mean poor returns in the future? Again, it seems plausible. You would look out and say, well, let me look at the countries that have strong GDP growth. And I would think that they are gonna have strong stock market returns in those countries. All right, seems plausible. That's the expectation. Let's take a look at what the data tells us here. Let's first look at high GDP growth countries. Those countries that have above median growth for that year. And here's what you see in terms of growth of a dollar from 75 on pretty good here. I think you have actually an average return for us of what this turns into. Mark, what's that average return? That average return at that time period was 11.6%. 11.6%. So pretty good returns. Okay, that's your high GDP growth countries. Let's take a look at your low GDP growth countries. What you actually see is that they've got a stronger growth of wealth and a little bit higher average return. What was that return? 12.2% average return. 12.2% over that time period. So again, we're trying to find this signal. And we're not here to say that, listen, you wanna invest in the low GDP growth countries. 'Cause first of all, this is not an index that is available for investment. It's a hypothetical example. And you'd have to be shifting between country to country each year, high to low GDP growth, transaction costs, potential taxes that are involved. Bottom line is you wanna look at GDP growth as an indicator of where to be invested. Again, not the strongest signal. It doesn't give you any way to say, here's what's gonna happen in the future. No relationship there. But we just looked at some of those average returns. And then you highlighted some of the returns we had in 2023. We had a strong start to the year in January. And so now what are we hearing when we look at our returns? This concept of we're at an all time high, both for the S&P, for the Dow Jones. And Jake, you know this is my absolute pet peeve with the media, is the way they talk about market highs. Because they write this narrative as if you just bump it up to the ceiling. When you hit an all time high, that just insinuates poor performance into the future. Again, people might say, okay, I get it. All time high, do I really want to be invested? Stay invested? Or should I put money to work? So we've gone out there and we've looked at this. And let's imagine this, that market is going up. It hits that period of an all time high. And for investors that were invested, they probably were happy that they captured strong market returns. Then the question is, should I stay invested? Or if I got money on the sidelines, should I put money to work? And listen, maybe markets do go down. I mean, that's what markets do. They go up and down. This kind of looks almost like the emotions that investors go through here, right? I'm really, I'm happy at the all time high if I'm invested. And then down here, maybe I'm not quite as happy 'cause markets have dropped. So what we wanted to do is say, hey, if you compared all time highs to something like maybe you're down greater than negative 10% in the markets, what would your average returns be? We wanted to look at the S&P 500 from 1926 to 2022. And every time you're at an all time high and you look out one year, you look out three years and you look out five years. On average, how do you do? One year out, 13.7%, pretty good returns there. Three years out, 10.6, that's annualized. And five years out, 10.2% annualized. So pretty good returns. Okay, how about the other side of the coin? Every time you're down 10% or more and you look out one year, three years and five years, on average, how do you do? One year out, 11.4%. Three years out, 10.3% annualized. And then five years out, 9.6% annualized. Mark, what's roughly the long-term return of the markets? Long-term returns about 10%. It's interesting how it just aligns perfectly between those two five-year numbers. And listen, we talk about this all the time. If you're not invested in the market, many times, where are you? You're probably in cash on the sidelines. And even though the return of cash is a little bit higher now, it's probably below those long-term market returns. So listen, people are again, are looking for a signal. We're at an all time high. Whether I'm at an all time high, I'm down 10% or more, or any time in between, I start to get out to five, seven, 10 years. Those returns look pretty darn similar. This is such an interesting example. And I suspect for the audience, it's something that's a little bit surprising. Most people expect it almost to be a different relationship there. But in dimensional, we look at this, and we're gonna think that that makes total sense. Because every day, the market is pricing these securities for a positive return into the future. Otherwise, nobody would be buying them at all. Great point. Okay, so all time highs. Jake, some questions have been coming in around inflation. Yeah, we don't necessarily have any slides here to show them today, but let's go ahead and address some of these questions. And let's use the same narrative of, hey, if I'm in a high inflationary time period, is that concerning for my stock returns in the future? Maybe low inflationary time periods, better for stock market returns. Yeah, we've looked at this as well. You know, people like to say, well, inflation is gonna do X, and stock market returns are gonna do Y. I mean, listen, we've looked calendar year by calendar year. And if you look in any given year, you can't really say that inflation's gonna do this and stocks are going to do that. There's not necessarily that relation year by year if we look at calendar years. In fact, then we've looked at high inflation years and low inflation years. And again, if you look at those low inflation years, you might think, oh, those low inflation years are gonna be better, and they're gonna have more positive years in the market. If you look at low inflation years and the positive and negative periods, and then you compare it to high inflation years and positive and negative periods, they're almost identical. Now, to be clear, what we do know is, is that over longer periods of time, stocks have done a great job of outpacing inflation, even in high inflation years. But to try to look year by year and find this relation between this is what's gonna happen with inflation, and therefore this is what's gonna happen with stocks, very tough to do. It's a great point about a very effective tool to outperform inflation over time, stocks are. But also too, does it have an impact on future returns? Yeah, absolutely. It's just we're wired as investors to say, this means this on that one particular item, but what we do know, yeah, inflation impacts returns, so do hundreds, if not thousands of other things. So you just can't quite isolate it to just one thing. Now, let's just keep going though on our indicators and talk about something that we are getting all day long every day. And we will get it all day long and every day until November 2nd, the presidential election. So Jake, I'm gonna put you on the spot. Is it a Democrat or is it a Republican that's gonna give us great returns in 2025? I appreciate this. We'll talk politics and then maybe we'll talk religion. This will be a good broadcast here. But now listen, we used to say every four years, now it seems every two years with the midterm elections that pop up here. What does that mean for stock market returns? So here's what we did. We went back and we looked and said, we take S&P data back to the 20s. This is every year where you get a presidential election. How did the markets do in that year? And what you see is a whole lot more positive years than negative years. And that's what you see almost every year. That's what you see over longer time periods, more positive years than what you see negative years. Average return, 11.6%. Here was your high return and here was your low return. Now people wanna know, well, but let's break this up by party. And what do we see here? I don't know. I don't necessarily see any pattern here. You might look and say, well, on these negative years here, the Democrats got three of those four negative years. And if we look at the lowest return, it's the Democrats. So those Republicans, they're great for the stock market. Maybe that's your argument. I don't know. I'd be careful on that one. Well, good point about the pattern, but let's just focus on those negative years. And let's say you look at that red dot there in 2000. Are you telling me the Republicans were responsible for the tech bust that year? Or the one next to it, 2008? Are you telling me the Democrats caused the global financial crisis all around the world? I think that's a stretch. I would agree with you on that. And listen, if you take and then look and say, compare that to all of the other years that are out there, average returns look pretty darn similar. And oh, by the way, that Democrat-Republican thing, yeah, it kind of flip-flopped there. I don't know, maybe it's the Democrats that are great for the stock market. And you can look by administrations here over time. In fact, again, the only two negatives I see on here are Republicans. So maybe it's an argument for the Democrats. Be careful on that. But listen, this is maybe the most important chart. And what we did here is say, go back as far as you can and look at that growth of wealth over time through different administrations. And there's one big thing that jumps out to me on this chart, which is that over time, markets tend to go up and to the right. And Mark, we talk about this all the time. Regardless of who's in the White House, do you think GM's gonna stop making cars? Do you think Amazon's gonna stop delivering packages? No, that's what companies do. Regardless of who's in the White House, who's in control of Congress, what tax rates are, what regulations are in place, companies figure out ways to make money. That's what they've done through time. If they don't, then they may go out of business. And you know what? That's capitalism. That's the way that it should work. I love how you say they figure it out. And just think about that elections for a moment again. Does it impact future returns? Yeah, probably, in some form or fashion, like inflation, like everything else out there. And again, companies do figure it out to make profits for their shareholders. You know, like how you said, just time in the market is a big takeaway on this one. Let your money work for you. And I wanna go back to the conversation we had on our national debt as well. Meaning, let's just sort of separate the investments and say something like politics, something we should have passion for. Absolutely. And care deeply about, absolutely. We are very blessed here in the US to be able to express our views politically, whether it's at the voting box. We can volunteer, we can run for office. We're privileged to have that right. And we should care deeply about it. But just again, separate it. Don't let politics impact your investment decisions. And I think there's a great line, if I get this one right, vote at the ballot box, don't vote with your life savings. Well said. Okay, let's keep moving on here to something that has actually a very high predictive value, Jake, the winner of the Superbowl. Boom. So let me give you the narrative. We got the Superbowl coming up here. We got the Chiefs, we got the 49ers. Now here's the way the story goes. If you go back in time and look at when the national conference wins the Superbowl, the market is up, it's positive 82% of the time. That is crazy, reliable numbers when it comes to the market. So here's my question for you, because I know you're a Chiefs fan. You grew up in Kansas City. You want the Chiefs to win or do you want a positive return in the market? Ooh, that's a really-- What's it gonna be? Who are you rooting for? I mean, that's a really, I'm obviously rooting for the Chiefs. You know, as an investor, maybe I'm rooting for the NFC. I think my daughters would actually say that it's Taylor that's gonna determine the outcome of the, maybe the Superbowl and the market. But no, listen, I mean, people do look to signals like this. And you told me, you told me 82% of the time. So I've got a really strong signal there. But would you wanna invest your money? You know, listen, there's research out there that says I can go out and count the number of sunspots and it's gonna give me an indication about market returns going forward. Even though the data says it, would you really wanna invest your money that way? And you gotta be careful when you see things like that. Just be sure you look at the evidence, the data around that. And it kind of raises a question then, you mentioned the indicators, the signals. We walked through some of the common ones that you read about. And you just don't see any relationship between X on those signals means good or bad market performance into the future. So I've got a question for you then is, if there is no evidence that that works, there's no evidence that market timing works, as investors, why do we keep doing that over and over and over? I think it comes back a little bit to human nature and a little bit of greed. And let's give an example here of what we mean by that. So let's imagine that you've got a couple investments to choose from here. And I'll keep it really simple in this example here. We're just gonna compare US treasury bills, short term loans to the government, to the S&P 500 index to represent stocks. And we could take it back to 1926 here. Let's imagine that you had $10,000 to invest. Now, if you kept invested over that whole time period, here's what your money would have grown to over that period, about 200 grand in treasury bills and about 145 million in the S&P 500. But let's play a little game here. Let's imagine this, you only have two investments to choose from, T-bills and stocks, the S&P 500. And every January 1st, you pick which one of those two is going to do better and you get it right. You have to stay invested for the entire calendar year in that investment, the one that's gonna do better. And you repeat this every January 1st from 1926 to 2023. Basically you make one right call per year between these two investments. What could your money have grown to? I'm gonna let the audience think for just a second. If we had time, I would love to do a poll and just capture all the inputs and the guesses of what this would be. I would love to see what people guess. I'll give you the answer right here. $20 billion, that's billion with a B, that's three commas, Mark. And you asked earlier why people try to find the signals and do it. And to me, this is a big part right here. 'Cause if I get it right, the numbers are so astounding. Incredible opportunity there. 21 billion if you do get it right. But I imagine the audience is sitting there going, you know what though, but I don't need to get it right every year. What if I just get it right some of the time? What if I'm right 30% of the time, maybe 50% of the time? To get to the same number as if you just held the S&P 500 that whole time period, you would have to get it right 70% of the time. Which again, as we talked about earlier, I haven't seen anything with that kind of reliability talking about future returns. It's a tough thing to do. Again, you think about that. Could I really get it right 70% of the time? And do I see anybody who can do that on a consistent basis? There's not a ton of evidence that shows that. Now you can look at the other side of the coin, which is the worst time, the worst luck ever. You can turn 10,000 bucks into 1600 bucks before inflation. But again, the question to me is, do you need to play this game to have the good investment experience? And I think we would argue maybe not. Yeah, maybe not. There's no evidence that you can do this. But I think it's a good example of why we do it as investors to do that year in and year out. Second question though, that I think we should address here is those indicators. And I liked how you said that it's plausible. It actually means why, but it doesn't really work. The question is, why doesn't it work? So that gets into a couple, I'll say fundamental beliefs we have here, dimensional around markets. It's really how the firm got started. Let me just highlight those two beliefs here. The first one is that known information is already in the price of a security, whether it's a stock or a bond. So everything we talked about earlier, all the news out there, whether it's good news, optimism, concerning news, it's already reflected in the price, it's known. So that's the first thing. The second concept that's fundamentally important to investors is this idea that prices are forward looking. And here's what I mean by that. Let's say you have a buyer and seller, they come together and they buy, sell a stock. They are looking at all this information out there, all this news, how is it going to impact the profits and the cash flows of those companies into the future? So you think about the future then, and what's gonna change the price? New information. New information. And so the new information, if it's better than what they're anticipating in the future, prices probably go up. If it's worse than what's priced in, the prices will probably go down into the future. And I think you have a really effective example of how that works here in real life. Yeah, this one came out last September. In fact, when I read it, I sent it on to you 'cause I thought it was so interesting. This is Dell Technologies. And what we saw back in September was we got a report that said Dell's sales are down 13% year over year. Now people would look at this and say, "Oh, that's not good. "Sales are down 13%." And yet on the same day, the stock pops 21%. Now you might look at this on the surface, say, "What the heck is going on here?" But to your point on expectations are priced in today, there probably could have been expectations for sales being down 15% or maybe 20%. And so when that new information comes in that's better than expectation, many times you see that stock price adjust on the upside. And I think there's an overarching theme here is that you're trying to make predictions about what's going to happen in the future. And listen, maybe Yogi Berra said it better than anybody. So it's hard to make predictions, especially about the future. But I wanna add one additional point to those two that you had earlier related to-- Hey, Jake, as you're going there, let me just make a plug. Oh, yeah. I saw a documentary on Yogi Berra. It's a great one. Anybody that loves sports, I think would really enjoy it. So just a little shout out for that one. Little shout out for Yogi there. Let me add this last point in here and it's related to predictions. Because it's not just about predicting the future, you also have to predict how markets will react to future events. Go back to 2020. Beginning of 2020, I give you all the headlines. I tell you, "Hey, listen, we're gonna enter this global pandemic. World's gonna kind of shut down. We're gonna be cooped up in our houses. We're gonna be working from home. There's gonna be a lot of uncertainty." What do you think is gonna happen in the stock market? Boy, I would say there's gonna be a debacle based on everything you just walked us through. Bad, bad, bad outcomes. You would think that that would be the case. And by the way, we did get a sharp drop in the stock market. We also got a very sharp rebound and pretty strong returns in many markets around the world that year. You don't know what's gonna happen in the future and you don't know how markets will react to future events. That's an additional challenge in market timing. Incredibly well said there. Now let's go back to the webcast. How the smart money is investing. And Jay, we think about, yeah, we talked and alluded to a lot here, the articles, the journalists, the people on television talking about all this stuff. They're very smart people, right? Very well-educated, hardworking folks. The problem is there's just so evidence that we walked through that any of that stuff works. So let's think about a different type of smart money when it comes to your investing. And to do that, let's highlight an article that came out about Dimensional back in 1998. It was called "How the Really Smart Money Invests." In fact, it came out on July 6th, a day after I started here at Dimensional, interestingly enough. But here's what the article did. It went through and highlighted a couple of major themes. The first one is if you're trying to do market timing, if you're trying to do stock picking, it is futile. It is so hard to do because you just don't know what the future holds. But they said, hey, here's a different way to think about investing. Look at the work these Nobel Prize winners have done. They've gone through decades and decades in data and research, understanding this relationship between risk and return, understanding the need to be fully diversified, fully invested in markets, manage your costs effectively. Those are the things that give you the highest odds of success with your investments. Well, and I relate it back to our health. I think there's a lot of comparisons between health and investing. If you think about health, I think many people would want a solution that's based on data, that's based on evidence, that's based on research, the academics, what's coming out of sort of the brightest minds in the medical field. And I think there's a lot of relation between that and investing. What does the evidence tell you? What does the data tell you? What are the brightest minds these Nobel Prize winning economists say about here's what we know around the data with investing. The other thing that I think in terms of relation with health is many times with health, people are looking for the quick fix, right? The fad diet, whatever it is, what's the easy out there? And what do we know? That it's really about getting sleep, about exercising, about eating healthy and doing it day after day, month after month, year after year. I mean, that kind of puts the odds in your favor. It's really similar with investing. People want the quick fix, they want the market time, they want the get rich quick scheme, but more often than not, it's about doing the basic stuff with investing and doing it day after day, month after month, year after year. That's what gives you the really good chance of success. There's no silver bullet and there's no guarantees. I love your example there of thinking about our health, doing all the things that make sense, a lot of research behind it. It can't guarantee your health, you can't guarantee markets, but do these little things to give you the best chance over time. Completely, there's a quote here at the end of this article that I really like and it gets at your question around sort of why do people do it? And I think there's always gonna be that temptation, as the article says here, to find the next Microsoft, to find the next hot manager. And in fact, Merton Miller, Nobel Prize winning economist here, really is honest and says, "Hey, listen, I pick a few stocks, "but I understand that I'm doing it "for entertainment value." And I think that's what we really have to understand as investors of there's always gonna be that kind of an itch that many people may feel they need to scratch. Just be careful going down that path. I wanna leave our viewers here with a couple thoughts here, just reminders related to our broadcast. And we say this all the time, Mark, is I think a lot of investing questions are market timing questions in disguise. And I don't mean that in a negative way. It's simply people are looking for signals that tell them when they can get the good and when they can avoid the bad. And you really wanna look at the evidence when examining these signals. Does it work on a consistent basis? And more often than not, it's not necessarily what we see. Understand decisions that put the odds in your favor. We just touched on that and related it back to health. And then this last one's great. You hinted at it earlier. Many times it's more about time in the market and not necessarily timing the market. It's such a great way to think about it. And I look at this as the smart ways to approach your investments into 2024. And one more I just add to that too is so many investors out there, they do need some professional help, helping them come up with a plan tailored for their particular needs, what they're trying to accomplish, help them stay disciplined, help them stay time in the market when things get a little bit tough emotionally for investors. So Jay, that is a fantastic summary there. One thing I wanna do for our audience here is let me just highlight our website, dimensional.com. If there's some work you wanna do to go in there and better understand these principles, these ideas around the investments Jake and I walked through here today, go and hit that website, dimensional.com. There'll be plenty of information there for you. So with that, let's wrap it up here. And let me just, first of all, say thank you for joining us here today. Thank you for spending the time with us. I hope you found it valuable. Some of these insights to think about your investing going throughout the year. If you have any feedback for us, go ahead and submit that in the question box. Maybe some topics to tackle in the future, things you liked today, things we can do a little bit differently. Always love your feedback. And then the last thing I'll say here is we just wish you tremendous success going into the year, not just with your investments on your investment journey, but just with life day-to-day with family and friends. Have an awesome 2024. And thank you again for your time today. Take care, everybody.