In this episode, Brandon and Amanda expose one of the biggest lies in the financial sector that almost everyone believes in…they reveal a huge truth about our economy while providing you with the tools to steer clear of these financial rocks.
Here Are The Show Highlights:
– How the financial sector sneakily manages to stretch ‘the truth’ and bend the fine print in their advertising ([3:45])
– The ‘buy and hold’ lie you’ve been brainwashed into believing ([6:50])
– How to actually understand expert financial jargon ([9:30])
– The problem with straight-line projections and the future of your money ([12:35])
– Where you should invest to make your money grow ([19:00])
Remember to download Grandma’s free wholesome wealth recipes book by dropping into http://www.grandmaswealth.com. Time-honored wealth strategies served with a helping of balance and trust.
If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting https://www.grandmaswealthwisdom.com/call…just like Grandma would want us to do.
A hearty welcome to Grandma’s Wealth Wisdom with your hospitable hosts, Brandon and Amanda Neely. This is the only podcast for strategies to grow your wealth simply and sustainably like grandma used to. Without further ado here are your hosts.
Brandon: Hey, I'm Brandon and welcome to Grandma's Wealth Wisdom where we help you build wealth grandma would be proud of.
Amanda: And I'm Amanda. Today's episode is titled Don't Count Your Chickens. We're about to expose one of the biggest lies in the financial sector.
Brandon: In order to expose these lies, we have to get a little technical, but we'll try to make the technical aspects as interesting as possible.
Amanda: Right. And I have to before we get started give huge credit for this episode to a really awesome guys I met earlier this year. His name is Les Himmel. Les spent 28 years in the variety of positions on Wall Street, and from that experience, he has such great insight into how things really work on Wall Street, and we're using a lot of that insight in this episode.
Brandon: I mean we thought we knew a lot because, of course, we watch television and then we watch the TV show Billions, which is a really good show, and I think Nacho Time, I don't know.
Amanda: Stars, one of those two.
Brandon: And it's about the New York high finance and all about buying hedge funds and hedge fund companies and the governments and how they're trying to regulate and all kinds of craziness. Very good drama. We've also watched lots of documentaries and shows about the 2008 crash, so not just the drama kind of stuff but real documentaries. So we thought we kind of had a an idea that we knew he happened on Wall Street, and then we met Les and we got the real story from an actual real insider.
Amanda: Right, and before we get into that, I need to tell you a quick story. When I was really young my brother and I would play a game when we were watching TV. We tried to see who could guess the product on the commercials, you know, what product was being sold the fastest, and sometimes they'd show the product right at the beginning and kind of ruin everything, but most of the time they would wait until the very end of the commercial and they'd finally show the product and we would try to like rush to see who could figure out what was being sold the fastest, try to guess before the product was actually revealed. Did you ever play that as a kid?
Brandon: We probably played some of those kind of games, I don't know that we did that specifically.
Amanda: I don't think it's a real game, I think we made it up, but if anyone out there ever played that too, please let me know that I'm not alone. But then when I was in high school I learned a different kind of game. I had this really awesome high school math teacher. Now I don't remember everything he taught us about algebra, geometry and calculus. I mean I do use some of those tools now, but there's one thing...
Brandon: I hope so.
Amanda: Right? There's one thing that definitely stuck with me throughout all the years since. He told us one day in class that every commercial we see on TV lies, every single one. So the next time I was watching TV I started looking for the lies. Now even today I don't watch as many commercials as I used to, thank goodness for DVR, but when I see them I still turn it into a game of looking for the lies. From paid actors to exaggerations. I mean a Big Macs don't look that good in real life, to flat out misleading information. It's really true. Every single commercial lies.
Brandon: Yeah, for sure. One big change from Grandma's day is that consumers are much more savvy. We're less likely to be tricked into buying something through clever commercials or ads, yet we still do sometimes. Yet still companies and politicians still spend big money on advertising and TV commercials in particular. Now we can't go into all the reasons why in a 20 minute episode, and it's kind of beside the point for our overall theme anyway. But suffice it to say in our generations we know we're being lied to constantly by ad after ad after ad.
Amanda: So when you're out there in the world watching commercials or seen an ad pop up on YouTube or wherever, there are two things to know about the financial sector. We are in wealth podcast, right? So we'll talk about the financial sector and their advertisements and sales process. Or if you're ever in a meeting at work where they're talking about, the HR is talking about your 401K and how much you should put in and what the match is and all that kind of things. Two things to be aware of. The first is that there are certain parts of the industry that are more regulated than others, there are lots of laws that have to be followed, but the laws are different for different products.
Brandon: Which means that some companies or sectors can get away with stretching the truth or hiding the fine print more than others. It's just like pharmaceutical commercials are more highly regulated then, say, cereal commercials.
Amanda: Right. The second thing to know is that Wall Street is coming after the money of millennials, especially when any wealth is passed down from our boomer parents, Wall Street types our advertising a lot to try to get that money that's going to be handed to you, to be handed over to them to handle it for you.
Brandon: Duh. Of course they're going to want to try and get that so before those millennials, you.
Brandon: Amanda, get that money, we wanted to expose some of the half-truths, AKA, lies that you might encounter way before then, or maybe that's coming to you now, so that you can make an educated decision. There are so many lies that we can't go through all of them in one episode, so we'll have to do a series about them in future episodes. So Amanda, take a note, more lies that we're going to debunk.
Amanda: Got it.
Brandon: But we'll tackle a really big one today.
Amanda: Yeah, we're sharing all of this because this lie is one that you'll start to see lots of places once you've seen it exposed, and Americans haven't been given the full picture when it comes to this particular truth about Wall Street. First and foremost, real lives are being impacted every single day because of this really big lie.
Brandon: So here's the big lie. Drum roll please. The market always goes up over time. Amanda didn't get a drum roll. The market always goes up over time, and that we can get a 10% return or more just buy and hold, that's the line, that's what they say.
Amanda: Yeah, especially those last three words. You hear that over and over again, buy and hold, buy and hold. Now this lie is steeped in the 1980's and 1990's when American, we were in this time period that Les likes to call "the roaring 20". For these 20 years, the stock market skyrocketed for a lot of reasons, but especially because so many baby boomers started putting their retirement savings into the market via 401K's and IRA's, which were started in 1980.
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Brandon: From the year 1900 to the year 1980 the Dow Jones Industrial Average cumulative rate of return was less than 4%. From 1980 to 2000, the cumulative rate of return of the Dow was just under 14%. That means the market was up in a very sharp way for those 20 years, yet this is what people have come to expect to be normal and continues to lure people in today.
Amanda: Yes. And then if we look at since 2000 we haven't seen anything near what was happening during that 20 year run from 1980 to 2000. That period was unique in history. And then when we start to think toward the future, no one really knows what is going to happen on the stock market, but we are seeing indicators like the boomers are starting to take their money out of the market for retirement, you know, they need to spend that now that they're stopping to work so they have to sell their stocks, they can't hold it. And of top of that, millennials are not putting as much into the market as the boomers were. So it's highly unlikely that we're going to ever return to those same returns of the 1980's and 1990's. Yet, to use them jargon that we'll explain soon, so many financial professionals are using arithmetic averages...
Brandon: Try saying that.
Amanda: That look at the last 30 years or more to make straight line projections for what future returns will look like. Here's what that means. They say things like, see if you've heard this kind of thing before, "Well the SNP 500 returned an average of 12% percent over the last 30 years, you can expect a 12% percent increase over the next 30 years. Thus if you save $100 per paycheck in this age based fund within your 401K, you'll have $50,000 a year available in retirement, or maybe even more."
Brandon: "Or this mutual fund over the last X number of years has returned an average of Y%. Therefore let's be conservative and say it will return Y-1% over the next X number of years."
Amanda: Yeah, and in case you're not being clear, this is a lie in so many ways.
Brandon: Let me say that again. This is a lie in so many ways and it affects your future.
Amanda: Yeah, let's break this down. First of all, when someone says a phrase like that they're using an average of changes per year, not a return. A return is a result of investment after a period of time. Whether it's one year, 17 years, 30 years, whatever period of time. And when you're trying to calculate a return, you need to take into account your purchase price at the beginning, your sales price at the end, and the income you receive between the two minus expenses like fees and taxes.
Brandon: Which always happens.
Amanda: Right, and the calculation of all of these factors gives a person their actual return on your investment. The change in the value of a stock is very different than a "return".
Brandon: So let me give you an example. In 2018, the Dow has done very little year to date, however General Electric, one of Dow's top 30 was cut in half. So they actually kicked it off the index in June. Now you might have been watching the index and thought we're doing okay, yet if you have General Electric stock, you actually weren't.
Amanda: The index is not tied to the individual stocks within the index, and neither is an actual return. It's just a changing value on a piece of paper.
Brandon: Secondly, the person giving you this sort of statement is not taking into account fees, taxes or anything else that comes into play when I need to figure out my actual returns. They're not putting that into the...
Brandon: Calculations, yeah.
Amanda: And they're allowed to do this. Remember we were talking about that there are a lot of the regulations about how to advertise or how to give you an idea of what to expect, they're allowed to do this. But these two aren't the worst. The worst is this one. When they're saying these kinds of averages, giving you an idea what to expect, they are ignoring volatility and they're using this straight line projection. The cumulative or real rate of return is very different from an average rate of return. So here's how this works out. We're going to do some basic examples here. An average change of return is calculated like this. In year one, if you're up 10%, in year two you're down 10%, your average change, your average return is 0%.
Brandon: Makes sense.
Amanda: But are you really even? No. If we use the real numbers, if you take $100 and it goes up to $110 in year one, a 10% return, then it would go down to $99 in year two, because 10% percent of $110 is $11. So even though the average return was 0, your actual return is minus $1. -1%, right. Another example, let's say year one year up 100%, year two you're down 50%, your average return is 25.
Brandon: That sounds good.
Amanda: Yeah, 100-50 is 50 divided by 2 is 25 But in actual dollars, $100 goes up to $200, and then back to $100, so you're exactly where you started.
Brandon: But then you have a 25% percent average return though.
Amanda: Right, but your real return is 0. Then third example, let's say you go up 60% in year one and then down 50% in year two, your average return is 5%. 60-50 is 10 divided by 2 it's 5%. That's your average return. But in real dollars, $100 dollars goes to $160, and then down to $80. You're at a loss. Your investment adviser can probably say that he or she got you a 5% average rate of return, yet you lost 20% of your original money.
Brandon: So we just used two-year scenarios. What would this look like on a larger scale, which again, that's for all of us using what actually happened in history.
Amanda: Okay, so I got some examples for this too. Let's say take the SNP 500 on December 31st 2000. The index is at 13,20. And if we look at the annual changes, the SNP changes year by year, and there's a lot of volatility, but if we take all those changes through December 31st 2016, when the SNP 500 is at 22,38, and then we find the average of each year, it's 5%. The average rate of return for those 16 years is 5%.
Brandon: That's with 2008 and 2009.
Amanda: Yeah, so I mean 5%, not too bad. And if you took $100, so basically the average is telling you if you took $100 at a 5% rate of return using that average return you'd have the end of the 16 years $218. But if you look at that $100 and you use that actual percentage changes per year, the real rate of return, you're only going to have $169, because the cumulative or real rate of return was only 3.35%.
Brandon: And then what about projecting into the future? How do we do that?
Amanda: So if we start then, January 1st 2017, we have the same $100, we project 16 years in the future, most advisers would use that 5% average rate of return and you'd expect to have $218. But then in 16 years, you might only have $169 or less after fees. Is right and is that adviser going to call you up and say, "Sorry, I'll pay you the difference. Here's $49."
Brandon: I wish, but probably not.
Amanda: Right. And then the better question is, are you going to follow that adviser's advice over the next 16 years?
Brandon: Yeah, the unfortunate answer is sometimes people do. So what you're actually saying is they're using a straight line scenario when we know it's not a straight line, there's volatility in the market.
Amanda: Yeah, and volatility is huge when it comes to your actual returns. In short, the projections are using consistent compounding, which definitely does not happen in the stock market.
Brandon: Yep, definitely doesn't. So all this leads to actual results that are very different than projected results.
Amanda: Yeah, so let's take this to that 401K. So let's look at a real example, let's say within your 401K you believe this lie and you have an amount that you're going to save each paycheck to give you the dollars that you want in retirement using these straight line projections and arithmetic averages, and you're just following this misleading information, but you don't know it's misleading, you're just following it. In this example we used $100, but what if you were saving up to a million for your own retirement.
Brandon: Which I hope people would be saving for their retirement, and a million dollars is a number what people should be doing.
Amanda: Right, if not more. But let's just say a million dollars and you end up following all this advice, you only end up with $775,000. You're $225,000 short. That can make a huge difference.
Brandon: That's 25%.
Amanda: Approximately, yeah. So the bottom line is this. If you're doing a set it and forget it type of investment and thinking the market will go up over time and you'll be okay, you're unfortunately being misled.
Brandon: And that's not how reality works. There are many people out there right now saying, "I did everything right. Everything I was supposed to, I did. I was supposed to have this much money and where did it go?" and the answer is volatility and a misleading anticipated trajectory.
Amanda: What we think we know versus what we actually see are very different. This is why we titled this episode Don't Count Your Chickens.
Brandon: So to bring this to a close, grandma's offered thinking 20 to 30 years into the future, but she's not interested with being misled
by averages when they aren't in reality. There's so much more that we could go into here. If nothing else sticks with you, remember this key phrase, "What's so secure about securities?" Even calling stocks securities is misleading. Next, ask yourself this question. Are you willing to go through 16 years of volatility for 3.35% actual return? We live in reality, not in averages.
Amanda: So how do you avoid the scenario of being ready to retire but not knowing where your money went? Go back and listen to episode three, A Stitch in Time Saves Nine for how compound interest can work in your favor. Then schedule a call with us at GrandmasWealthWisdom.com. Once you get there just click on "request a meeting".
Brandon: Or you can go and request a meeting and then go listen to episode three, whichever way you want to go. So next time we're going to talk about the FIRE movements. Now this isn't about the firefighters or anything like that, FIRE actually stands for Financial Independence Retire Early. There's some good and some bad things about this movement, and will be lighting the match in the next episode.
Amanda: Until next time, keep building your wealth simply and sustainably for your own future and the future of our grandchildren's generation.