Tariffs, Turbulence, and How To Stay On Track

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

The markets have been bouncing around lately, and headlines around tariffs and trade tensions are only adding fuel to the fire. Investors are understandably on edge, but it’s important to separate noise from what really matters. Today, we’ll unpack what’s driving recent market volatility, what role tariffs are playing, and how to stay focused on your long-term plan.

Walter Storholt:

It’s another edition of Retire Smarter, and boy, do we need a little bit of smarts to navigate what we’re all going through right now in the markets and in the financial world. Looking forward to the great guidance and perspective that we’re going to get on today’s show, not only from CERTIFIED FINANCIAL PLANNER and also Chartered Financial Analyst, Tyler Emrick, but we have two for the price of one today, folks. Kevin Kroskey is back with us again, an additional wealth advisor of course, and CERTIFIED FINANCIAL PLANNER at True Wealth Design.

I’m Walter Storholt. It’s great to have you with us again, as we hear from the great team at True Wealth Design. And guys, I can’t wait to hear your perspective on today’s episode of what’s going on in the markets, because I know there’s a lot of fear, consternation, worry. I mean, just emotions are running high right now with all the ups and downs, or mostly downs I guess, over the last week or two, that we’re experiencing right now. So, hopefully you guys can be some calming voices in this storm that we find ourselves in. I’m not trying to be overdramatic here, but it does feel like that, I think, to investors right now.

So Tyler, since you’re the consistent voice on the show at this point, we let you get first billing and say hello.

Tyler Emrick:

Oh, that’s fair. Yeah, no, I’m happy to be here. We had to bring in the big guns, we’re certainly happy. We understand there’s been a little bit of bouncing around here and some big headlines, so we’re happy we’re going to have some time set aside to talk about it and kind of roll in from there. Kevin tried to get off the podcast today, he had a little bit of technical issues getting in here, getting his mic set up, I don’t know. Walt and I were in here for 10 minutes.

Walter Storholt:

Yeah, he pretended to have lost his cord.

Tyler Emrick:

But we got him all set up.

Walter Storholt:

Kevin, welcome back. Good to have you with us, man.

Kevin Kroskey:

Yeah, thank you Tyler. Thank you, Walt. It feels good to be back in some regard, but it seems like my visits these days, besides talking about some wonky tax strategy, is bank failures and now market downturns. So, if anybody’s out there and wants to go grab dinner sometime, I’m probably not the best guest to go out with. It’s pretty boring or perhaps depressing.

Walter Storholt:

That’s right, yeah. We only pull you in for the rough topics, it seems like. We’ll have to pull you back for like a sunshine and rainbows kind of topic at one point, just to balance things.

Kevin Kroskey:

I’ll look forward to that environment. Absolutely, I’ll take that.

Walter Storholt:

Yes.

Tyler Emrick:

Yeah, absolutely. I mean, what we’ve experienced here since the beginning of April certainly is largely attributable to that escalating trade tensions, the implementation of quite significant tariffs, and certainly the heightened market volatility and investor uncertainty are playing a fact in there as well. Gentlemen, I believe today is the date. We’re recording this on the 9th of April, so I think tariffs are going to be in effect here or certainly have already gone into effect at 12:01. So, we are in the thick of it.

As with most of these topics and things that are affecting our lives, we’ve done quite a bit of research and been trying to dive into the impact for us and the families and a lot of that stuff.

I was listening to a podcast from Flexport’s COO, Ryan Peterson, and he was just kind of talking about the impact of the tariffs to his business. They’re a logistics company and they do quite a bit of freight movement. They were just talking about some of the challenges that the businesses themselves are trying to navigate through with the tariffs. And not only that the tariffs are in effect, but these reciprocal tariffs are actually implemented a little bit differently, where hey, traditionally maybe the tariff or the duty be paid when the vessel reaches port. And these reciprocal tariffs are now getting implemented when the vessel actually leaves the port, not when it arrives. And how the companies have been just scrambling to try to wrap their arms around how these are going to impact them.

I think April 5th was the first deadline, if I remember correctly, gentlemen, where the 10% tariff would be coming into play. And then here today, April 9th is where rates actually increase to whatever the specified rate is for this certain country. So, I know a lot of our families here are worried, certainly worried about their financial situation and how they’re playing them for it, but obviously these companies are being impacted and trying to make some pretty big decisions and some pretty tough decisions around quite a bit of uncertainty here. And we’re seeing that reflected in the market, no doubt about it.

Kevin Kroskey:

Yeah, Tyler, I think it’s a good point. I happened to listen to that same podcast too, that you referenced, it was quite insightful. With usually how the tariffs are due once they do arrive in the US, and now it’s going to be upon as long as things were shipped yesterday, they won’t be applied. So, I guess there’s some runway there before the tariffs are actually going to hit these goods that are coming in. And it certainly sounded that companies have been looking forward to this potential risk for some time and building up inventory. So, there’s generally at least some leeway there. There the companies have had some forethought and just did some prudent planning, so perhaps these higher prices won’t be passed on as quickly. And hopefully, this whole situation can resolve itself in some way.

I guess to make at least a brief comment, but the tariffs, and it’s kind of I would say a bit of a misnomer on these reciprocal tariffs, I mean, just to be dollars and cents and facts about this. The tariff rate in general from studies that I’ve read has been about 2% or so in the US. China’s certainly an outlier and hasn’t played nice in global trade for quite some time. So, I think they were the poster child for some repercussions to be dealt with here and have more free and fair trade. But free and fair trade is really what has allowed us to create the significant amount of wealth that we have in this country and in others that participate in those free and fair trade practices.

So when we look at longer term, hopefully these tariffs are used more as the bargaining chip, rather than something that’s going to be more permanently focused, whether it’s to raise revenue or something of the sort. It seems to me anyway, quite shortsighted and to most economists, that the tariffs are actually going to bring back manufacturing and things like that to the states. And again, this isn’t a political statement, it’s certainly not meant to be that way, but when you think about if you are that CFO or you’re looking at that company and trying to make a good decision about what’s best for your company, your employees, your shareholders, your customers. And a lot of these companies actually moved their operations out of China and over into places like Vietnam and other East Asian countries after 2016. I mean, that took considerable time and considerable investment of other resources to go ahead and make those moves. And now all of a sudden those countries are having tariffs imposed as well.

So, even if countries were incented to move operations back to the US, I mean, these are very long-term decisions. And you have another election here every two years basically, and the presidency every four years. And even if you did want to go hey, let’s bring everything back to the US and actually build the manufacturing here, one of the things that I thought was pretty insightful was from that same podcast too, is like look, just physically you can’t do it. Even if you need to build those factories, you’re going to need to go ahead and bring in a lot of equipment that’s only manufactured in these other parts of the world. And so, even if you did want to build out and pursue this, whether it’s on some economic policy, national security policy. To get the equipment and to get the machines and to get the supplies, you’re going to have to do these imports and have to expose it to tariffs, and then that ultimately makes these investments less worthwhile.

So, I think all of this just creates an incredible amount of uncertainty, which we’ll certainly talk about when we get into the investment portion as well.

Tyler Emrick:

I liken it back to COVID in ’21 and ’22, when our industry as financial advisors, we’re always trying to wrap our arms around just how is this impacting our families? How is this impacting our portfolios? And it reminds me of the inflation spike in ’21 and ’22, and Kevin and I were getting all granular about CPI data and what was lagging and what’s not, and what’s actually being reflected in the data. While there was some pretty spirited conversations, getting that granular, I mean, tariffs kind of are bringing that back and reminding us. And obviously, the market’s reacting in the way that it is to it as well, trying to wrap its arms around what’s going on here. It’s a very, very difficult environment to be navigating through, which is why we got it up here today to talk about.

Walter Storholt:

It’s definitely reminiscent. And guys, as a non-financial advisor, I know you’re plugged into this every day and you know the ins and outs, but I don’t know, maybe a lay perspective, I find it really hard to keep up with all of this. Because it’s one, the percentages of tariffs and how they’re determined and the reasonings for why X, Y, and Z are happening. I guess it’s like we’re seeing the sausage being made, rather than already having the sausage made and then being told, “Here’s what’s happening.” We’re seeing live negotiations happen in real time, and that’s kind of, I don’t know, it feels like new territory, but it makes it very uncertain and very difficult to kind of just track what’s happening all around you, from my perspective.

So as soon as you kind of get your grasp or your grips on kind of one perspective, boom, it changes two seconds later with a Twitter announcement. And so, I don’t know, it’s a really difficult time to try and figure out the balance between short-term pain and long-term gain and the reasonings behind all of these things. And I feel like that leads to that more uncertainty.

Tyler Emrick:

Yeah, uncertainty, right? You said it twice, maybe three times in that blurb there. So I think uncertainty is key, right? And Kevin, I don’t know about you, but I feel like that uncertainty, market doesn’t like it, and that’s kind of what we’re seeing reflected down with what, the S&P down somewhere around 15%, Nasdaq, 20% here year-to-date. Markets do not like that uncertainty, and trying to make investment decisions and business decisions and things like that are very, very difficult for these companies to be able to do that.

Kevin Kroskey:

Yeah, totally. So, that gets right into the investment part of the portfolio too. And ultimately, at least when you’re looking at say the risky or the equity part of the portfolio, we are investing in these companies that are trying to make profits, trying to grow their earnings, serve their clients, have good team members provide those benefits. You have a lot of interested parties when you’re looking at that, and if they have that uncertainty in their decision-making, so what do they do? I mean, one, they’ve got to make sure that they have cash. Two, they’re certainly not going to be making long-term investments under a high degree of uncertainty. That would be a pretty foolish thing to do. And ultimately, that’s going to flow down to the earnings that they have and what we receive as investors too. That’s kind of the longer-term underlying gravitational pull of investment. Ultimately, the rate at which these companies grow their earnings over time really is what’s going to drive the stock price.

There is this other component too, where it’s more of a valuation component. How much is somebody willing to pay for that earnings growth stream? And that varies quite a bit over time. If you look back, say over the last 15-ish years or so, like post-financial crisis or GFC for short, a lot of the earnings growth certainly has been good, particularly for some of the big technology names that are garnering headlines all the time, but quite a significant amount of the price appreciation has been because those prices have been bid up. They’re willing to pay higher valuations, whether it’s going from say 16 times earnings to 20 or 25 or 30, or sometimes even higher than that. And now, when you have a time of severe uncertainty like we have, who knows what’s going on? I mean, even if this was something that you see as being a good economic policy, I think it’s very hard to say that the way that it’s been discussed and implemented even between the key leaders has been inconsistent, at best. And so when you have conflicting messages out there, absolutely it’s going to create even more uncertainty.

The markets were certainly not expecting this uncertainty, I’m going to stop doing that now.

Tyler Emrick:

[inaudible 00:11:56].

Kevin Kroskey:

But you get the jist. And so what’s happening in times of distress like this, just like in March of 2020, just like in October of 2008 for the financial crisis. When you have a very high degree of certainty, everything goes down pretty much in unison, in terms of risk assets. And at least coming into this year, diversification was certainly working well. There was something, Tyler, I know you spoke about here recently, like what to do in market downturns was a prior podcast. And I don’t know what the title of this is going to be, but what to do in step two of a market downturn, or hopefully something better than that. And hopefully this doesn’t continue along, but it’s gotten worse. And so, there’s no doubt that the tariffs were much more than what the market expected, thus the big negative swings that you saw last week, and now you’re seeing some knock on effects for all risky assets.

When you don’t know… Tyler, let me ask you Mr. CFA, and if anybody doesn’t know, CFA is kind like the gold standard for being an investment professional. It’s much more difficult of a test to pass than CPA or CFP when you’re looking at it. I know a lot of smart people that couldn’t even pass level one, let alone all three levels. So Tyler, I’m giving you enough props here, so don’t let me down, but-

Tyler Emrick:

I was going to say, Walt, can you be my lifeline? Can I phone a friend here?

Kevin Kroskey:

What’s the difference-

Walter Storholt:

I’ll pull up ChatGPT while you’re answering.

Kevin Kroskey:

Walt’s just happy. He’s like, man, I’m glad Tyler’s here and I’m not getting this question.

Tyler Emrick:

I don’t know if I signed up for this, huh? I’m bringing the Kev back, but, hey.

Kevin Kroskey:

What’s the difference between risk and uncertainty, Tyler?

Tyler Emrick:

The difference between risk and uncertainty? The way I think about it when I think about uncertainty, I go back to, I don’t want to get too technical here, but I don’t know, the VIX kind of came into my mind. The VIX is how when I was going through studying all those tests and trying to pass it, it’s kind of the index that investors use to kind of gauge like, well, hey, how much uncertainty is in the market and is it a risk on or risk off type deal? I mean, [inaudible 00:13:57]-

Kevin Kroskey:

They call it the fear gauge, right?

Tyler Emrick:

The fear gauge, yeah. I think it got up to 60 on like an inner day here on one of the days here, the last week or so. But 60, just to kind of put that in perspective for listeners. The historical average kind of floats around what, 15 to 20 or so? So, it was two to three times higher. So when we see that spike, that fear gauge, as Kevin had mentioned, it really pops up. So, that’s when I think of uncertainty and certainly maybe some heightened risk. The VIX kind of is the first thing that popped into mind.

When I think of risk, I think more portfolio allocation, I think more risk to the construction of the actual portfolio and how we navigate that. And just making sure that, I don’t know, the old adage is, “You don’t get your hand caught in the cookie jar,” type deal. So, doing very good things like portfolio rebalancing and things like that. But am I along the lines there Kevin, or do I?

Kevin Kroskey:

No, no, yeah, I agree with you. And one other note I would mention about the VIX, just for historical context. The VIX got up north of 80 during COVID. It actually got up north of 80 in August of last year when there was some unwinding of some levered investors in the market, and also during the GFC, it got up over 82. So, we’re not all the way to where those higher watermarks have been, but we certainly did get up there. I think I looked this morning after it opened and we were in the higher 40s. It dipped down into the 30s the other day.

But if I go back to the direct question, the way I think about risk is, it’s similar. I think it’s something that you can price, it’s something that you can model, like in the context of the portfolio, like you were talking about in diversification and outcomes. But when you talk about uncertainty, it’s just kind of the unknowns that are out there. You can’t really price what somebody is going to say or do coming out of the White House or how long this is going to stay on. I mean, these things have happened over time. I mean, we haven’t seen big policies like this from a tariff perspective for many years. Certainly, I mean to this extent, almost never. I mean, basically 100 years ago. So, it is in some regard uncharted territory.

However, no matter the cause of the uncertainty or the risk, I think you’re always looking at markets behaving similarly. They’re going to discount prices, particularly if you don’t know the risk and you can’t price it and things are highly uncertain, then you’re going to see things drop in unison. And of course, when you look at the risky assets, when you look at US equities especially, that’s what’s happened. And because much of the US market has been quite expensive as we’ve talked about, not just over the recent past, but it’s been that way for quite some time, for multiple years. Certainly, there’s been ebbs and flows to that, ’22 was a big decline for both stocks and for bonds, and seemed like a trend back towards some sense of normalcy and getting more towards reasonable historical valuations. And candidly, that just didn’t happen.

We were fortuitous in the sense that we had very positive returns in ’23 and ’24, but now that we had this uncertain event come in and come in so quickly and just, again, not unprecedented, but I mean, this is a shift. There’s no doubt about it, in terms of how world economies work is a huge step backwards from globalization. And that’s been going on now for probably 10 plus years and more the de-globalization effect, but this is a really big change. And so, that’s why you saw virtually in unison all risk assets go down. And again, the ones that are higher priced, because they are built on really high growth expectations, those are the ones that have course corrected significantly more.

Now, when you look into the other part of the portfolio, I mean, and this goes back to Tyler’s point about diversification, it’s one, I mean, virtually no client has all just those risky assets that are in there. I mean, we really believe diversification is kind of the only free lunch. And so if you can do it in a very thoughtful way and stick with it, ultimately it’s going to smooth out the ride. But that smoother ride is also going to allow you to have higher compounded returns.

Now Tyler, I’m going to give you, I’m going to throw… This is fun, I got to come on more often just for this purpose alone. All right, Tyler, tell me-

Tyler Emrick:

Am I graded on a scale here?

Kevin Kroskey:

Let’s tell the audience what the difference is between average returns and compounded returns and why that matters.

Tyler Emrick:

Yep. So I don’t know, have we done a podcast on sequence of return risk in a while? If we haven’t, maybe that needs to be up on the docket here. I know we have some that-

Kevin Kroskey:

We have some back in the retirement income series, it’s I think episodes in the 30s, but there’s a four or five parts. We’ll have to post it in the show notes, but we definitely go through it there, because it matters a great deal when you’re talking about retirement income.

Tyler Emrick:

Absolutely. Well, especially for individuals who might be staring down, hey, I’m plan on retiring this year, I planned on retiring next year. If the market continues the way that it is, how is that going to impact me and that retirement picture? And should I work longer or should I not? And are we going to be okay? But I think you’re getting to the point of, well, how when your portfolio, I don’t know if many individuals and families realize just how volatile the stock market can traditionally be. And if you catch one of those volatile times and potentially maybe you’re withdrawing from your portfolio, withdrawing from your accounts and how that can potentially be almost a double whammy there. You think about times like the great financial crisis of ’08 and things like that, where we took a pretty substantial leg down. Those retirees that were potentially pulling money from their portfolio, it could certainly be the double whammy there.

But I think it’s much easier to get average returns if you give me a long period of time, Kevin, if that’s fair. But picking any given year and telling you what return it’s going to be is, it gets very, very difficult.

Kevin Kroskey:

You got it, and when we talk about diversification too, it’s like if you have things that are going to behave differently and smooth out that ride, ultimately those compounded returns are going to be higher, particularly than the individual assets average returns.

The example that we always use is like, hey, if you have $100 and you get a 50% return. Now Walt, so I’m going to throw you the softball because I know you’re missing out on these questions.

Walter Storholt:

Oh, God.

Kevin Kroskey:

But this is truly a softball, all right? So if you got $100 and we get a 50% return in year one, how many dollars do we have at the end of year one?

Walter Storholt:

150.

Kevin Kroskey:

All right, now let’s get another 50% return in year two, but we’re going to put a negative sign on it, so we’re going to lose 50% in year two. How many dollars at the end of year two?

Walter Storholt:

Oh, we only have 75.

Kevin Kroskey:

And our average return, if we got plus 50 and minus 50 over two years is what?

Walter Storholt:

It would just be zero.

Kevin Kroskey:

But we didn’t get a zero return, did we? We actually lost 25%.

Walter Storholt:

No, we’re down 25%.

Kevin Kroskey:

And that’s maybe a very simple egg-headed-

Walter Storholt:

It’s the opposite of the egghead.

Kevin Kroskey:

Yeah, it’s the opposite anti-egghead. Excuse me, thank you, Walt. Call me out, buddy, that’s totally fair, right? But that’s the difference between the average return and the compound return.

One thing I’ve always liked to say, and financial humor is difficult and I probably have even more of a challenge with it, but it’s, compound returns are what we eat. Those are the things that actually drive our dollar growth over time. And when you get into these periods of volatility and uncertainty, that’s really where diversification can kind of kick in and provide the balance to your portfolio, and can do so in a multitude of ways.

So when you think about, okay, let’s acknowledge we checked that all equity assets are down, some more than others. Those that have been higher priced and have high expectations of growth built into them, they’re down a lot more. A lot of that is within the NASDAQ, and Tyler, I think you said, what, NASDAQ is down about 20% or so? So, definitely more than the S&P 500. But if you go into say a cheaper, like a US large value index, it’s going to be down even less, but they’re all still down and down quite a bit. That’s the uncertainty kind of driving those trades. But if you go outside of the equity part of your portfolio, what we call them are preservation assets, basically high quality bonds, not too risky. There can be risky bonds and there can be higher quality bonds. Preservation, as the name implies, it should be able to preserve assets.

So really for the last two years or so, when you look at the US yield curve or just how interest rates have been behaving, you’ve been getting rewarded pretty well for owning very short dated assets. Comparatively, usually as you go out in term, you think of this as a mortgage, if you go from a 15 to 30 year mortgage, usually you’re going to be paying a higher rate for that 30 year mortgage. And those rates have been pretty much on par with each other. The longer term rates hadn’t been much higher and it had been that way for years. I’m sure we’ve all heard the yield curve inversion on the news at some point over the last couple of years. And that was really kind of correcting here. And you’re seeing, even though short term rates were high, you’re starting to see other parts of the yield curve get more normalized and go up.

So we’ve been hanging out and just getting kind of that short term, very safe preservation type return precisely for a few reasons. One, it was attractive, the yield curve was inverted. But two, it’s really the ballast in our portfolio. Client needs distributions coming out to make sure that they can use the money that they’ve worked hard to grow and accumulate, and they need it for their lifestyle and the things that they want to do, the heat in the house, the food in the belly, have some fun, go out to dinner, whatever their lifestyle actually consists of and costs. That’s money that we can rely on. It’s kind of segmenting and reaching into your portfolio and the different ingredients that are in there. That ballast of a very short term cash-like investment is very, it’s held up in times like this. You’re not going to have that sort of risk or that risk off, that’s really a kind of a safe haven asset that you’re going to see.

So one, that’s something that we’re looking at now. We’re certainly happy that we have it, but it’s also providing some dry powder to rebalance and buy some of these depressed assets that have gone down in value in this uncertain environment.

I’ll mention a couple other things in the portfolio and then maybe we can relate it to some of the financial planning aspects of it as well. But when you think about some fears that are going on right now. Tyler, you talked about the VIX and kind of the fear gauge. And we’ve been communicating with clients, we sent out an email on Friday just talking about the situation, trying to provide a little bit of clarity, a little bit of confidence, and also just letting them know that we’re here and if they needed to talk then we certainly could. And certainly several calls, all of the advisors have had those. And as we’ve gone through that, inevitably you’re going to have some people that want to talk about timing the market. Tyler, a fair statement that you’ve had some of those calls maybe just, “Hey, maybe we just want to sell and go to cash,” have you had any of those?

Tyler Emrick:

I have, absolutely. And I don’t think those families are alone in bringing up that question. I mean, I always liken back to the consumer confidence and stock market survey that Michigan does every year. We’ll have to maybe bring it out here again, we used it quite a bit back during COVID times. But really, it just takes survey data on how individuals and families are feeling about their confidence in the stock market. And I go back to the data from last month and we were approaching a trough close to COVID, and that doesn’t even account for what we’ve experienced here since the beginning of April.

So, I can imagine what the data is going to show come April. And so individuals and families are concerned, and I think now more than ever when you’re like that, having someone that you can call, someone that you can email, someone that knows your situation, knows your family, and knows what you’re trying to accomplish, can help you kind of talk through those decisions and making sure that you’re understanding all the levers that go into that decision, and making sure that we don’t kind of lose sight of the long-term approach and kind of setting some perspective for what we’re seeing here.

Kevin Kroskey:

Yeah, and I had one of those, I’m having one, actually. I’m sure I probably got another email or text message while I was on the podcast. But a very good friend, one of my best friends, and who’s also a client. And he’s getting kind of wrapped up in this emotionally, but I’m doing my darnedest to make sure that he doesn’t make an emotionally-based decision. And those are the things that can hurt you quite a bit, and it’s our job to make it clear, concrete. It’s not like we have a crystal ball. It’s not like we’re saying we aren’t concerned about the situation. Things are highly uncertain and the prices have gone down for a reason. However, now’s not the time to just panic out and make an emotional decision. Time and again, that has proven to be a bad thing for investors.

Often, the biggest down days are followed by some of the biggest up days. And if you’re trying to time the market like that, there’s been just a plethora of evidence over the last 100 years or so in looking at returns and how investors get these returns, that those timing decisions are a net subtraction from value. You may get lucky, we don’t believe that luck is prudent. We’re happy to receive luck, but we’re not going to rely on luck or just make luck part of our forecast and hopefully get returns that our clients need. But we’re going to design the portfolio in a way where we do have things, like the short-term bonds that are there that are cash-like, that are the dry powder that can meet your lifestyle expenses and give us ability to kind of get through these tough times.

And then there’s also the other things in the portfolio we’ve had in there, it’s basically kind of a systematic trend. So, all the things that somebody’s talking about doing in terms of timing. A trend strategy, there’s some good behavioral evidence for it, supporting it, candidly, it’s very difficult to own. But it’s doing what some of the people want to do, in terms of trying to time the market, it’s just doing it in a lot smarter fashion. It’s looking at prices that are increasing or decreasing, and then basically it’s just trying to piggyback on those trends. In 2022 when both stocks and bonds went down in unison and people were looking at their portfolios saying, “Hey, where’s my diversification?” Trend did incredibly well that year for one, it was one of the few asset classes that did. There’s other things in the portfolio too, that we’ve had. Reinsurance has been a big focus in most of our portfolios for the last two years. It has no credit risk, meaning that it’s kind of secured by treasury bonds, but it’s taking more of an insurance type risk and it has very attractive yields.

So, I just mentioned these three components for one, you have a short-term government bond-like investment, very cash-like. Again, it’s going to be there, you’re going to be able to meet your monthly distributions for your spending needs throughout retirement. We’re going to be able to use that for dry powder to reinvest. We have this reinsurance that is not correlated. It does not behave in a similar fashion to bonds or to stocks or to riskier credit type bonds that may have a default risk if things get really bad. It’s a very unique type of return stream, and Walt, I know you’re probably finger on the trigger for the egghead alert, but I’m not going there, buddy. But that uniqueness-

Walter Storholt:

You were building up to it.

Kevin Kroskey:

And the fact that you have a different source of positive expected return in a portfolio, that’s diversification when it comes down to it. You can have something, you can have 10 different, we see this all the time when people come in as prospective clients. They may have a plethora of holdings, but if you put it all together, it’s like one big S&P 500 index fund. They’re just paying a lot more for it and have a lot more complexity and don’t really understand what they have. Well intentioned, but poor execution, I would say.

When you think about diversification or the way that we think about it is, you really need to have some things that are going to truly behave differently and also hopefully have unique sources of return, like the reinsurance, like the trend fund definitely does too. The short-term cash is cash. Equities are different, those are all definitely risk on and when risk is off and things are highly uncertain, you’re seeing those all come down in unison. There’s other things that we have in our portfolio too, but I think those are a few good, hopefully clear examples of why we own what we own, what they’re in there and designed to do, and why over time those should yield higher compounded returns. And then ultimately, we would have more dollars to make sure that we can sustain our lifestyle.

Tyler Emrick:

I think you put that into perspective from a portfolio standpoint, but we also don’t want to lose sight of it in the standpoint of your personal financial situation and what you’re trying to accomplish and your goals, and how your portfolio is then being used to make those goals come to life and using them, right? This whole idea of lifestyle risk, Kevin, I think you mentioned it a couple of times, but it’s this idea that, what’s the risk you’ll need to change your lifestyle in a market downturn, right? If you’ve done a good job in your planning, I think you should be able to answer that question or at least have a plan that you can go back to and read back through or talk to your financial advisor and work through to kind of reaffirm the fact that hey, the plan’s put in place. This market volatility is not necessarily going to, if that planning is done right, necessarily affect what those day-to-day decisions are and what you’re trying to accomplish, from a plan standpoint.

And this whole idea of having a, we call it a preservation assets or having cash-like investments or investments that zig when everything else zags. Understanding how that could potentially be used if we have a prolonged period where the market continues its downward trend. The question becomes is, if you’re sitting here as a retiree, where is your money coming from to live off of and what do those expectations look like? And how much of your overall portfolio is maybe sitting at cash at a bank or in a savings account or in a money market or in your portfolio in these short-term bond-like positions that you could lean on for an extended period of time without having to realize any losses in the stocks that might be depressed or might be down?

We did this exercise quite a bit with most families, especially during COVID. I’m sure it’ll be back on the docket when families are coming in for their progress meeting updates here in the spring and into the summer. And really just trying to wrap our arms around and making sure the families feel completely comfortable with how long that runway might be before they would actually have to sell out of investments that might be depressed or down or experience some major volatility. I think when we did that, a lot of our families, we’ve seen runways to where they might have 8, 9, 10 years before they have to dip into those stocks, Kevin. I mean, those runways can get pretty long.

Kevin Kroskey:

Oh, totally. And when you think about even for the financial crisis, I mean, COVID was incredibly short. We’re talking about months and several weeks before really that kind of V-shaped recovery happened. But when you go back to say the financial crisis, markets started going down in late ’07 and reached the bottom in March, I think it was March 9th ’09. The reason why I know that is because we rebalanced that day and some clients have those positions and that’s their cost basis date, and those are positions I can’t sell because the gains are so high because we got it right at the bottom. Not by design, but just by executing the process prudently.

But you can have a longer time period, and when you look at it, I’ll take a kind of quick tangent here. Some people will kind of go back through market history and they’ll say well hey, you look at this period with the Great Depression, or even through the ’70s when you had the high inflation, market returns were bad, longer data bonds did not do well, and they’re just looking at kind of the point levels of the index and they say, “Look, the market didn’t make any money for 10 years or 15 years or something like that.” And that’s shortsighted, they’re missing out on any dividends, they’re missing out on rebalancing, they’re missing out on the total return. I’ve actually gone back, and I did this during the financial crisis because I needed it for my own self-assurance, but basically kind of piqued to trough decline, worse than US history anyway. If you go outside of the US it would be worse, but in the US it’s been about three years.

So if Tyler’s talking about, and we’re talking with our clients, we’re saying, “Okay, hey Mr. and Mrs. Client, you have X dollars. Half of those dollars are in these risky assets that just went down in price, and the other half are in less risky or cash bond-like assets.” You can pull those assets that are doing better and haven’t been depressed in price down for a period of at least five years. None of our clients, we would never design a portfolio and put together a plan in place that has preferably less than five years of runway, and where we can at least draw down those safer assets and give time for equities to rebound.

Again, some clients, just because their plan is incredibly well-funded and their spend rate is fairly low compared to their resources, they may have 20 plus years of runway. I can think of some client situations where maybe they were forced to retire early and missed out on some peak earning years, maybe there was a health issue. I can think about one client that maybe had about three years of runway. So even if you’re a three, that’s not what we would generally prefer, but most clients have 5, 8, 10 years. And when you look back through market history, there just hasn’t been a time where you couldn’t spend down those safer assets. And then just give time, buy time for those risky assets to go ahead and rebound and get the returns. We took the risk, we want to make sure that we stick around for the returns.

Tyler Emrick:

Over the years, I mean, going back to the stock market data, you have gotten paid for taking on that risk being in the equity market. So, that’s the reasoning for taking on the risk is those higher expected returns over the longer time periods when we start talking about your retirement. I mean, that time period, that time horizon, I mean, that can be upwards of 30 years or more. So, we want to be cautious not to lose sight of where the boat’s going and those long-term goals and objectives. And I think runway is a wonderful way to kind of take a step back and look at your overall situation during times like this when it can get extremely hard to be invested in the market. And looking at it from that perspective can give you some reinsurance about just what the plan’s like and making sure that you can kind of buy back into the plan and make good financial decisions.

I mean, another thing, one other thing from a planning standpoint that we’ll probably be leaning on as families start to come in here in the spring and summer, is maybe looking back and some prior bear market tests that we ran during our plans. Bear market test is just a fancy term for us to kind of back test the plan and the portfolio against what we’re experiencing here, maybe even to a greater degree of what we experienced. I liken it to what we experienced in ’08 with the Great Financial Crisis, and really seeing how those plan results change under a time like that. And then also kind of saying all right, this is what we expected. Let’s see what the plan results look like on the update this year and just lean on it and let’s run that test again and just make sure and reaffirm that, hey, the plan’s in good place. And give you that peace of mind and understanding of that, hey, what’s my lifestyle risk and how is this market volatility truly impacting what I’m trying to accomplish from my plan and my goals?

Kevin Kroskey:

Well, I’m thinking back to COVID. I remember we were talking and then it’s like things were changing so rapidly we were like, all right, let’s go weekly. We’re not just going to do twice a month. We’ve got to go weekly.

Walter Storholt:

That’s right.

Kevin Kroskey:

And even then, things were changing so quickly, but during that time period, we kind of developed this dashboard, a report where we could see the client’s runway. So we’re talking about, sure, we’re meeting with clients, but we’re obviously proactively reaching out. We’re not just going to wait for somebody to come in for like an annual or biannual or whatever.

Walter Storholt:

You’re not saying, “Well, they’re due in in two months. We’ll make some moves then when they come in.”

Kevin Kroskey:

Now, so, what’s cool? I think it’s cool. Now again, this is me, this is what I do, this is my passion. But we have a dashboard where it’s, at least we can look at their withdrawal rate from the last year. If they’re spending down a bunch of cash externally, unfortunately, we don’t have an easy way to measure that. It’s kind of a good reason to have everything kind of under one advisor’s purview, so we can at least make better decisions for the client. But let’s assume that we do have kind of everything under our purview and clients taking out, say, out of the million dollars, they took out $60,000 last year or something like that. So about a 6% distribution rate. Not too bad, but we’re looking at that. We have a dashboard built to measure this, it’s called the runway report. It’s like, hey, what was your distributions over the last year? How much do you have in these different buckets that we call the appreciation assets, the diversifying assets, and then the preservation? And then we’ll basically look at the runway from preservation assets alone and then preservation plus diversifying.

And the other thing that’s, I guess a benefit today that we didn’t have working for us during COVID, was rates were incredibly low at that time. They were very, very low. We had our lowest allocation of preservation assets at that point in time. We had a lot more of those and allocated to diversifying assets that were a little bit higher yielding. But where we’re at today, and we’re still getting paid pretty well to be in that short part of the safe curve in the short-term government bonds, and yields are appreciably higher today than what they were back then. So, even when we’re looking at that runway report, and it’s really kind of a nice fancy Excel sheet in our trading and reporting software, but we can sort like, who’s got the lowest runway? What does their success rates look like for their financial plan? It’s all in one dashboard, basically.

But when we actually factor in the income return, because we are in this higher yielding environment, even if we’re seeing a client maybe has like five years runway or so, when you actually add in the expected income return, because they’re getting a four or 5% maybe higher yield in certain cases, that’s actually going to extend that runway even longer, probably a few additional years in many cases. So, that’s certainly a bigger benefit that we have today that we didn’t have working for us in the time of COVID. But we are most certainly looking at that report now, and depending on how the market goes, we could be having another podcast here talking about increasing risk as well, like we did back then. The markets had sold off so much when we looked at that runway report, there were some clients that we wanted to make sure that maybe we needed to take some preventative action, maybe we needed to hold back on an expense if we could, if it was a discretionary expense.

Then on the other hand, you have other clients and many of them that have a lot of risk capacity or ability to take risk. And then through our relationship, we know clients that may be more or less comfortable in taking risk in an uncertain time. And we reached out to them proactively and suggested that they increase risk, not because we had a crystal ball, but just because it seemed where prices were, and even if you kind of play out some of the worst scenarios, that things were going to bode well for long-term investors, and they did. And then in ’23, candidly, for a lot of those people that we added the risk to in 2020, we started reducing it.

So, you’re never going to get the timing right. If you go back and you think of the pre-dotcom period, there was obviously, I would say obviously we’re becoming more dated here. I’m banging on the door of 50 years old here, so I’m saying obviously, and there’s probably some younger people listening like, what was the tech bubble? They don’t remember the ’90s, they weren’t even born then. So, I got to be mindful of that.

Tyler Emrick:

What is the tech bubble? I don’t know, what is that?

Walter Storholt:

Tyler [inaudible 00:40:53] as an opportunity to age himself.

Kevin Kroskey:

[inaudible 00:40:54].

Tyler Emrick:

Come on now, huh? I’m not going to miss that opportunity. He said it.

Kevin Kroskey:

But the book was written called Irrational Exuberance, and then that term was popularized by Alan Greenspan, the chairman of the Fed at the time. And it was written by, I’m drawing a blank. He ran the Yale Endowment, he’s since passed on. He actually won a Nobel Prize too, but he just talked about how the prices were irrationally exuberant and really couldn’t be justified.

Walter Storholt:

Was that Shiller?

Kevin Kroskey:

Yeah, Robert Shiller. Thank you, Walt. And when you had that, he wrote that book, I think ’98 it was published, which means that he wrote it probably over ’97 or so. But the market bubble really didn’t burst until really, March of 2000 when it started going down. So, it took some time. You’re never going to get the timing right.

These trend strategies I mentioned will certainly be able to follow those trends, but timing is an incredibly difficult thing to do. So, even though we increased risk during COVID for certain clients that had the risk capacity to do it, we took that risk off, or at least had the conversation with the client about taking it off in ’23. And personally, all my clients followed that recommendation, but returns in ’24 were good. And in hindsight it would have been better to kind of leave it on for another year. I have no idea of how to time that. But things were getting pricey for even more so than what they were. There were some other issues that we saw, and it just didn’t seem like taking the risk was worth the expected return, particularly when we had some pretty favorable assets elsewhere. And so, we took that off, and now here we are in ’25. And where it didn’t look like a good decision in ’24, everybody that had made that decision is certainly happier now that they have a lower risk in their portfolio.

So, it’s one of those things where there’s, I’ll reference another series here that we talked about our investment process, we talked about our retirement income framework. Those are back kind of, at least at the early days at this point in our podcast history. But it talks about how you really, at least the retirement income, it needs to be dynamic. You need to go ahead and plan accordingly. You need to know where your returns are expected to come from and what assets are going to be held up in other different market or economic environments. So you can go ahead and thoughtfully go ahead and procure those assets from your portfolio, pluck it from your portfolio, deliver that income you need to preserve your lifestyle, while we can be thoughtful and strategic with the rest of the portfolio and make it work for you and make it grow long-term.

So it’s part art, it’s part science. It’s a heck of a lot of determination and relationship with a client, and hopefully building that trust and confidence and just getting them to stick with the plan. If we can’t get our clients to stick with the plan, candidly, we fail them, and we don’t like to do that. And it takes two to tango, but it’s our job to be that shining light of not just eternal hope, but hopefully pragmatism, well thought out strategy and execution, and guide them through this. And hopefully, that’s what we’re doing today and we’ll continue to do for the days forward.

Walter Storholt:

Well guys, we’ll definitely link to those two series that we talked about in the show notes of this episode. So just check the description or the show notes, wherever you’re listening to the program today, whether it be on the website or your favorite podcasting app, check those out.

I think you put everything in a great perspective today, because I imagine that I’m not the only one who’s trying to figure out, and you guys hinted at this for sure, is this a COVID? Is this going to be short-lived and we’re back up and running before the summer and it’s like it never happened, in a way, to the markets? Or is this going to be more like 2008 or some of those other times in history where it’s taken a little longer to rebound and get back to normal? And what I’m hearing is if I’m a client of True Wealth Design, it shouldn’t really matter because of that runway that you’ve talked about. We’re going to absorb and handle whichever direction we take, whether it be the V or a more extended recovery at some point. And you’re going to look for opportunities to maximize the situation, whatever it turns out to be in the meantime.

But if I’m not a client, and I’m panicking a little bit, if I’m thinking this downturn, if it lasts through the year, I’m in trouble. I can’t retire this year or next year unless the market returns to where it was, or I have some other concern that I don’t get the quick recovery. That seems like the signal to me that I don’t have a great plan in place. I don’t have that diversification, I don’t have the runway. And so, I say no better argument than to pick up the phone, call you guys, go online, schedule a visit to start figuring out how we can get that better plan in place so that we can solve this runway issue, so that these times of downturns don’t cause so much upset stomach symptoms for many people.

Kevin Kroskey:

Totally.

Walter Storholt:

Does that wrap it up pretty good?

Kevin Kroskey:

Yeah. I mean, you got it, Walt. I mean, and we’ve been doing this for quite some time too. I mean, Tyler and I have been working together now for seven years, and I started True Wealth back in 2005 and really got going a couple years after. But so, we’ve been through a few of these market calamities.

Everyone’s a little bit different. Certainly we’re going to do a prudent planning to guide our clients through it, but if you don’t have a plan, I mean, it’s like you’re trying to make decisions in a fog. We already have enough uncertainty, we don’t need to add more to it. You got to start with the plan. You have to know what your lifestyle costs you to go ahead and live and run. And you really need to have that pre-planned fire drill too. What sort of expenses are really needs? There’s really not discretion there. I have to make these payments, they’re core to my lifestyle and to my being, to my well-being for that matter.

What things are discretionary? The example that I always use is kind of the second home. There’s certain clients that we’ve had where they retire and they’re happy as clams, and they’re like, “We didn’t have that second home in the plan before retirement, but we sure as heck would like to add it now.” That’s a big shift for many people and thankfully, we’ve navigated that pretty successfully. But we’ve always pre-planned and say, “Look, if things don’t go as planned, if they don’t go well, then you’re not going to be able to hold onto this for a long time. And we have to be prepared to make that decision because we don’t want to make the core part of your lifestyle of who you are and your well-being, we don’t want to put that at risk.”

So if you don’t have that plan that accurately measures what it costs to live your lifestyle and really kind of help guide you and force you to think through what is truly discretionary and what’s not in your life, then you’re kind of going in and you don’t have a plan. It’s just like you’re adding fog on top of fog. So, it absolutely starts there.

At the same time, right now, if somebody came in our office, and we would certainly prefer to start with a plan, because then we can make smarter investment decisions. This is a period of time where if you see a very big investment problem through a heightened degree of uncertainty like this, you take preventative action right away on that too. You can do the plan simultaneously with that, and then you true up the investment plan as you move forward and the financial plan comes to being. There’s a lot of people, because US equities have done well over the last several years that have just kind of piled up and piled up and piled up on that risk, and they took a big beating in 2022, but then it bounced back in ’23. It wasn’t prolonged, ’24 was good, and now here we are again and those same assets are taking an even more accelerated beating.

So if you had a bad year in ’22 and if you’re down more than broad market indices right now, you have a portfolio problem, I’m not going to sugarcoat it. And while this may sound self-serving, it’s not. It’s, you need to talk to somebody that’s trustworthy and that’s competent. And we’ve been talking on, I’ll say these airwaves, I don’t know if that’s actually, that’s not accurate though, Walt. I mean, on these-

Walter Storholt:

[inaudible 00:48:18].

Kevin Kroskey:

… fiber waves for years. And so if you’ve been listening for a while, you’ve gotten to know myself or Tyler and the quality of the work and our thought process behind all this stuff. If it sounds like hey, these guys, it sounds like I can know, like, and trust them, and we can communicate, now’s probably a pretty good time to explore a relationship. Particularly if you have those portfolio problems I just pointed to.

Tyler Emrick:

Yeah, you go through times like this, it definitely kind of rears its head and they kind of get exacerbated. And you not necessarily having a plan or things that you can rely on to help you make more educated and better decisions, it kind of, just times like this is where that becomes very apparent.

And Kevin, you gave a little bit of that insight into runway and some of our systems. I mean, if your advisor, you think about what they’re doing and the systems they have in place, if your advisor isn’t rebalancing your account or isn’t available for a conversation or doesn’t talk about prior plan and prior conversations and relate that to what’s going on now, those are probably tell tale signs too of, hey, there’s a different approach. And an approach that’ll help you kind of navigate these decisions with, emotion’s always going to be there, but at least making sure that there’s some education and some data behind some of those decisions that you’re making. Whether it be portfolios, whether it be withdrawals, or whatever the case is.

Walter Storholt:

Kevin, I think we could go with in your feed or in your ears, maybe. That’s like the 21st century version of the airwaves, so.

Kevin Kroskey:

There you go.

Walter Storholt:

Or in your feed, your RSS feed.

Kevin Kroskey:

Thank you.

Walter Storholt:

That would be the podcast-y way to do it, I suppose.

Well guys, great breakdown. Very clearly, if you want to work with the True Wealth Design team, it just starts with a simple conversation to see if you’re a good fit, first of all. You can have a conversation with an experienced advisor on the team by going to truewealthdesign.com. Click the Let’s Talk button to schedule that 20-minute discovery call. That’s truewealthdesign.com. We’ve got that linked in the description of today’s episode, so check it out there. You can also call 855-TWD-PLAN. 855-TWD-PLAN, if you like the old-fashioned phone call method. But again, easy way to do it is go to truewealthdesign.com, click the Let’s Talk button to schedule your initial conversation and start to explore if you’d be a great fit to work with one another.

Guys, thanks so much for the breakdown. I have to say I feel a couple notches smarter today after hearing you guys go back and forth on these topics. Really helpful, thanks so much.

Kevin Kroskey:

And hey, Walt, you did the math so well on the 50% return and [inaudible 00:50:48] this little golf clap in the background for Walt.

Walter Storholt:

Thank you.

Tyler Emrick:

That was good.

Walter Storholt:

Ready for that, I was ready for some alternative percentages, but you kept it easy, so I appreciate it. All right everybody, we’ll talk to you again next time right back here on Retire Smarter. Until then, take care.

Speaker 1:

Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.