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Retire Eyes Wide Open: Season 3 Episode 5

REWO S3E5: March Madness and Your Money

Welcome to Season 3 Episode 5 of Retire Eyes Wide Open, hosted by Scot Landborg.

Listen to Scot's Money Monologue (1:50-11:55) on March Madness and your money. In 5 Minutes on the Market (11:55-17:47), Scot shares his thoughts on the state of the market. Stay tuned for our comprehensive Money Rundown (17:48-28:47), and in our Money with Murph segment (28:48-43:54), Steven connects March Madness with your investing strategies. Plus, we answer your Listener Questions (43:54-56:24)!

To hear more episodes, CLICK HERE.

Episode Transcript

Introduction: 

 SCOT:

Welcome to season three, episode five of Retire Eyes Wide Open. I'm Scot Landborg, here with Steven Murphy.

Today we're talking March Madness and your money. There's been two strong months in the market to start the year. Are things going to get bumpy or are new all time highs ahead of us?

In my Money Monologue, we'll talk about how college basketball's biggest stage has applications for your portfolio.

You'll hear our segment 5 Minutes on the Market.

We'll cover the top news in the Money rundown.

Steven Murphy, a college basketball legend with his biggest takeaways on basketball and financial planning.

We'll also take your questions.

This is Retire Eyes Wide Open.

Money Monologue:

SCOT:

And now for my Money Monologue. March Madness is here. College basketball's biggest stage. I love it. I'm a huge fan. We've shut down the office to celebrate. It's great to watch great competition. A Cinderella taking out a fan favorite. It's fun to fill out a bracket, compete with your coworkers. Now, whether you like college basketball or not, 15 million people watched the tournament last year on CBS.

Here are some of my biggest takeaways on March Madness and your portfolio.

Number one, upsets will happen. You know they're going to happen. They happen every single year. A fifteen seed upsets a two seed, some no name team beats your favorite team. It's going to happen and it blows up everybody's bracket. It's not unexpected. You know, It will happen.

Same thing can happen in your portfolio, and for investing. You may have a stock that you've loved. Maybe it's been the best performer for you over the past ten years. But guess what? The next decade may be different. Maybe there'll be a new leader. You may have a company that you've worked for, you've accumulated a whole bunch of individual stock.

It's a big part of your portfolio You think you can never lose. You think it can't go down. You think it'll be there forever. Upsets can happen. The unexpected can happen. In financial planning, when you're managing investments, there's something called tail risk. What is the risk of a portfolio? Guess what? There may be a small, small risk that something blows up, that something big happens.

But that risk is real. And upsets can happen in the NCAA tournament often because you've got so many games back to back and it's one game you lose and you're out. In pro basketball, the game is a lot different, but in the playoffs you've got a five or seven game series. If a team or a player has an off night, no big deal because over that five or seven game series, hopefully the best team prevails.

The beauty about March Madness and the NCAA Tournament is one game. You lose your out, you've a bad night and you're done. And with stocks, it's just important and with investing, it's important to know that just like in the NCAA tournament, where upsets can happen, upsets in your portfolio can also happen. It's one of the reasons why we diversify.

You don't have all of your eggs in one basket because if something happens to one of your favorite positions, it doesn't hurt your overall financial plan.

Number two, it's okay to pick some favorites when you're fleshing out your bracket this year.

A lot of people, it's popular to pick the favorites. And if you don't know anything about college basketball, if you pick the favorites from every one of your brackets, you have a pretty decent chance of winning the bracket pool.

And the reason is because if some of those top performers make it through to the next round, you get more and more points each round they advance. So you're a novice and you're filling out a bracket challenge for the first time. If you pick a bunch of favorites, you could end up doing pretty well. I think the same thing applies in your financial life, in your portfolio.

Don't be afraid of owning some favorites. Some go-tos. There's a reason why some of those greatest American companies have done so well over the past decade. There's a reason why they are the darlings of Wall Street, and many analysts are favorable on their future over the next year or in the next few years. It's okay to have some favorites in your portfolio, and there's reasons why they are favorites.

They've got good earnings. Their earnings are growing. They've got good profitability. The fundamentals of their business are good. It's okay to have a significant portion of your portfolio, not only be favorite companies, but favorite indexes, favorite funds, favorite sectors.

It's okay to have those favorites in your portfolio. And if the analysts community has a consensus on improving conditions in a position, it's not necessarily a bad thing to have a concentration there.

Number three, look for value.

Value is important when you're filling out a bracket for March Madness.

One of my secrets for putting together a good bracket is to start paying attention to the college basketball a few weeks before March Madness is here. Take a look at the at the Big Ten tournament or the SEC tournament, how the different teams do.

And it's interesting to see sometimes the winner of the Big Ten is not a number one seed, maybe they’re a three seed, maybe they're a five seed. So, in bracketology and building a good bracket for March Madness, sometimes you're looking for value. Is there a team that has momentum? Is there a team that's got a really good squad but maybe exited their local tournament early and now they're still in the tournament but a lower seed. Where is their value? Same way with investing. It's not just the favorites that should make up a balanced portfolio, but where is the value? Is there a sector that's not favored?

Is there a company that's been punished that's down more than it should be?

When you look at the long term fundamentals, when you look at the earnings growth, when you look at the profitability, where is there some value? It's important. You shouldn't just be overpaying for companies and overpaying for sectors. Where is there value? You want to fill out a good bracket, You want to fill out a good portfolio. Thinking about value is important.

Warren Buffett, one of the greatest value investors of all time.

When the world gets greedy, he gets scared. And when the world gets scared, he gets greedy. Sometimes it pays to be a little bit of a contrarian when it comes to investing, at the very least. Keep your eye open for some value players.

Number four Realize that it's impossible to be perfect.

You cannot build the perfect bracket. You will not build the perfect portfolio. What you can do is keep improving. What you can do is

know and embrace the fact that it won't be perfect. Warren Buffett used to put out a cash prize for anyone that could build out the perfect bracket for March Madness. And guess what?

No one has ever claimed it. No one has ever done it. It’s the same way in your portfolio. You are going to have some players. You're going to have some picks that you make that are definitely not going to work out. That's one of the reason why diversification is so important to not have all of your eggs in one basket.

And diversification is not just about stocks and bonds, but diversification is also about diversification of your investment strategy.

There are so many people out there that want to make investing simple. I'll just buy this index. Close your eyes and never look at the rest of your life.

Now there can be a place for buy and hold investing. There can be a place for index investing, but it doesn't absolve you from the need to continue to be educated and to evaluate your strategies.

If you lived in Japan and you bought the Japanese index, it took you 30 years to get back to even. If you bought the S&P in 2001, it took you a decade to get back to even. If you bought the Chinese stock market a few years ago, you're still licking your wounds from that. No strategy is perfect and diversification is not just stock and bond ratio.

It's not just individual positions. It can be sectors. It can even be indexes themselves. Are you in the S&P? Are you in international? Are you in bonds? Are you in value versus growth? And why? Are you in the Nasdaq? Are these the questions that you can be asking?

And it's important to remember that it's impossible to be perfect.

Number five, there can be lots of winners.

Now, there's only one winner of the NCAA March Madness tournament at the end of the day. But there are a lot of stakeholders that are winning, right? The local venue, the universities and colleges that progress, anybody that's a Cinderella, there's a lot of winners. If you just make it to the Final Four. That's part of building a winning program and a winning franchise.

Investing there can be winners, there can be losers, but there can be a lot of winners. What you want to build is a team, a diversity of winners. You might have a stock, an index, a strategy that's winning for you. You want to let those flowers grow in your portfolio and realize that one of the best ways that you can diversify your portfolio is to have a team of winners.

The thing about investing is we're not solving for one tournament, right? You may be investing for a decade, maybe two, maybe 40 years ahead of you. How do you build a team of winners? And I think a better way to think of it is a lineup on a basketball team. You might have your starters, you might have your center, you might have your guard, you might have a good three-point shooters and you have some bench players, you have some players you might be developing.

You want to have some cohesion and diversity in your team for different types of circumstances. But make no mistake, investing there can be lots of winners, not only on your team. You can make money investing your neighbor can your friends, your coworkers can. You want to have the right strategy though that is appropriate and fits for you and what you're trying to accomplish?

Those are my biggest takeaways for March Madness and your money. Upsets will happen. It's okay to pick some favorites. Look for value. It's impossible to be perfect, and there can be lots of winners.

And that's my Money Monologue.

5 Minutes on the Market

SCOT:

And now for our segment, 5 minutes on the market. Is it going to be March Madness in the market or are we going to see new all time highs? Let's dig into it. S&P year to date up 7%. The Dow up 3% Russell up 1%

Emerging markets up 1.5% and bonds are down 1%. If we look at where the top 20 analysts on Wall Street where they think the market is headed, the biggest bull thinks the market's going to be up 14% at the end of the year. The biggest bear thinks that the market will be down 12%. Some of these analysts have had to revise those projections as the market has had a really strong first couple of months in the year.

Now, where do we think the market is headed and where are we going from here? Well, 85% of the indicators that we track are positive. Just 15% are negative. So, I think that's a good sign. What are the top items that we're focused on? Well, the Fed has let us know that they're probably not in a huge hurry to cut interest rates with how strong the market, how strong the economy is.

They're making it clear that they're likely going to hold and probably be cutting rates second half of the year, something we've talked about before, but I think is still critically important. When the Fed cuts interest rates in a recession, it's a bad sign. But if you're not in a recession, which is where we are now, it's typically very positive for the market.

A year later, I think inflation continues to be a big driver. If inflation can stay muted, the market will have potential to continue to rally. If it comes back, there'll be more challenges ahead. Some very important statistics. The market has reached a new all time high in the S&P. It's taken a couple of years to do that. And historically, over the past 75 years, when the market's taken a year or more to reach a new all time high, it's been a big positive.

The market's marched higher 13 of 14 times on average 15%. Is investing at an all time high the wrong time to invest? I don't think so. If you look at this, this recent report, the one year performance of the market, when the market reaches a new all time high, you're looking at about 10% per year versus if it's not an all time high being over 11% per year.

So still very positive sign for the market and not a reason to be cautious about investing. Now with the market up in January and February, two positive months in a row to start the year since 1950. A year later, the market's been higher, 27 out of 28 times on average, 14.8%. We seen some good flows into the stock market, flows coming from people's cash, some FOMO, some fear of missing out, people adding more money to the equity markets.

I think that's a really good sign. The top news items we're keeping an eye on is recession. The fear of that really has evaporated. We look at the Federal Reserve. The odds of them cutting interest rates by May has declined significantly, was above 80%. Now it's very, very low. So the number of rate cuts expected has come down.

International conflict is still something to keep our eyes on, whether it's Ukraine, Russia, with what's going on in Israel, it has not really had a big impact on the markets and the economy. Most relevant market commentary is with such a big jump higher in the markets to start the year, even the biggest bulls are getting a little bit wary, like, hey, are we are we over our skis here?

We need to slow down a little bit so some type of correction is absolutely normal, happens every single year and it would be expected with the run up that we've had for the first couple of months. Many are concerned about AI, are we in an A.I. bubble? It's possible we'll keep an eye on it. And it's important to know that the run up that we've seen in the S&P 500, if we look at some of the charts the last 15 weeks, the S&P has been positive.

That's the best streak since 1972.

Would it be likely that there could be a breather in the market? Absolutely. Most relevant market data that we're watching, GDP growth has still been strong, has still been good. Earnings, earnings projections are good. They're strong. Profitability for companies has been quality and small caps.

We still think there's a very good opportunity. There's been a real divergence, large cap versus small cap. We think small cap likely has a good year this year. I think also positive is a lot of growth we've seen the market has come from earnings. It hasn't just been multiple expansion. I think that's positive. And remember, keep a little perspective.

You look at the past three years, the market's been really flat outside of tech and some of these tech companies. It’s been a tough few years for the market broadly.

Something to keep in mind is P/E ratios for the eight largest companies pretty high, but the bottom 492 are within historic averages.

Still a ton of cash on the sidelines. I think that's reasons why the market could get pushed higher as there's more FOMO out there. Our biggest commentary on the market, I do think there's more upside to this market.

If you look historically, a correction of 3% or more happens on average seven times per year, a correction of 5% happens three times per year and a 10% correction on average happens every single year.

So, our biggest takeaway on the market there is more upside we think in this market, an inter-year correction could be expected. I think small caps present a good opportunity, buffered equities are definitely worth looking at, and some more active strategies, some more individual securities selection I think could be very valuable.

And that's our 5 minutes on the market.

Money Rundown:

SCOT:

And now for the Money Rundown. Our Money Rundown segment is where we cover the week's news. There's lots of media sources out there that are going to give you updated information about the economy, about the markets. Our job is to help summarize and synthesize, help pick out a few stories that are most important for you as a retiree or investor.

Joining us today, financial advisor Steven Murphy. Steven, welcome.

 

STEVEN:

Hey, Scot. Glad to be here. All right, Scot.

Our first story. Primary season is officially over. Former President Donald Trump and President Joe Biden are set to square off in the November election as both took commanding leads in the delegate counts for their respective party nominations. So, it begs the question, do elections matter for your money?

 

SCOT:

Thanks for the story, Steven. It's a big topic of conversation with clients. Do elections matter? And I think historically, there's a ton of data that we've gone over with people before on your ability to make money regardless of who's been president in the past. Mixed, Republicans, Democrats, split Congress, different White House. You've been able to make money in a lot of those different environments.

We even look at our recent history. Biden was president. We made money in the market. Trump was president. You made money in the market. And if you look historically, that's really been the case. I think one of the most important things to know is going into an election year, the 12 months prior to a presidential election are typically very positive.

Now, one of the things I would say is historically, the first quarter is often the slowest quarter going into an election year, and yet we've been red hot. So, we might have had a bunch of the earnings for the whole year already pulled forward. We're going to have to keep an eye on where things are at with that.

But I think the election this year has less to do with where the market's headed, has more to do with inflation. It has more to do with what the Fed is going to do. And if earnings can keep on the right trajectory. Steven, what do you think?

 

STEVEN:

Yeah, I mean, I think this is politics is something that obviously is very near and dear to most people's hearts. And it's an easy one to get fixated on when it comes to your investments and your retirement plan as a whole. We meet with people all over the political spectrum, and everyone has a fear that if the opposing party gets into office that it's just the end of the economy.

This is something that we see commonly, that around elections, again, if someone of the opposing party to your beliefs gets elected, we get the emails and the calls and the meetings that I want to go to cash, I want to go to precious metals, all of the quote unquote “safe investments”, because they feel that the market's going to just fall off a cliff.

So, I would push back and encourage you as an investor to realize that the reality is, is that data doesn't quite agree with that. It's easy to have that fear and that emotion about it. But this is one of those ones where you really kind of need to take a step back and understand that most big market corrections that have occurred throughout history occurred from an external catalyst and not necessarily who was in the Oval Office.

So just keep that in mind. Don't make any rash decisions and speak with good mentors and guidance to make sure that you are staying on track.

 

SCOT:

Good stuff, Steven. Yeah, I think that so much of our job is we deal with people that are far right wing, far left wing, middle, all over the spectrum. I think our biggest challenge is thinking through all the stuff that's being proposed or talked about or that becomes law. How does it impact your bottom line? How does it impact your pocketbook?

How does it impact the investment strategy? And what's crazy is sometimes what you think is going to happen doesn't happen, right? When Biden was elected, I thought the energy sector was going to get hurt and it wasn't the case. Energy rallied really strongly for the first couple of years after Biden was elected. So, the question is, no matter what you might be facing in the world.

How does it fit into a strategy? I think overall, as long as you approach things, you're not making knee jerk reactions and panicking, it's part of a bigger picture, you've thought it through, you thought through the pluses and minuses, I think you're going to be in a much better spot.

 

STEVEN:

Our second story, A.I. everywhere! Will A.I. - artificial intelligence keep pushing markets higher, or is the bubble ready to burst? The value of the Magnificent Seven and a 2023 strong. But there are some cracks forming and some new leaders are emerging. So how do you profit from artificial intelligence or are you already too late to the party?

 

SCOT:

The A.I. question is huge. Everybody's talking about it and it's been a huge driver in the market. I was looking at one of the biggest A.I. stocks today doubled in the first two months of this year. It's been just crazy to see the growth. Anything that's talking about A.I. has been rallying. And what's been interesting this year is the Magnificent Seven now is at the Magnificent Six, five, four, three.

There are definitely some cracks emerging. So what could you do? I think A.I. is going to be part of the conversation for decades to come. We are in a revolutionary period. I think what's really interesting is seeing companies, their earnings have been growing dramatically. It just hasn't just been hype, you know?

Some of the biggest movers have seen big moves in earnings.

And I've seen some companies where the PE ratios, even though the count the value of the stock has doubled, the PE ratio stayed the same because the earnings have doubled. So that's been really interesting to watch. And I think you've got to start thinking about what are going to be the other beneficiaries of A.I. You have to be careful because I think it's starting to feel like a mania with some of these companies that have been rallying so strong, so quick, you're bound to have a little bit of an air pocket.

And I think if you're going to be in A.I., I think you want to be looking at players that are proving it with earnings. I don't think you want to be speculating with companies that are losing a bunch of money that have negative earnings per share. I think you want to be looking at companies that have proven and demonstrated that they can grow the bottom line.

That'll be one thing I'd be talking about and also think it fits into your overall risk tolerance, right? Where can you take risk in your portfolio? Maybe you're more aggressive with the Roth portion, Maybe you want to buy and hold that individual position in a taxable account. How does it fit in your overall picture to see where A.I. is going to be appropriate?

Steven, what are your thoughts?

 

STEVEN:

Yeah, I think artificial intelligence is commonly said to be the next Internet and I think there's a lot of truth to that. But I think when you look back at most major cultural technologies that have come into play, whether it be even the automobile, 100 and 120 years ago, the most recent one has really been the Internet.

When you look at it, it really has been hard to pinpoint specific companies for Internet. You look at old Internet providers, browsing companies, you weren't investing in one company that owned the Internet for lack of a better term. It really just becomes a part of all companies. So artificial intelligence is probably going to be the same that it's not one company or a couple of companies that dominate artificial intelligence, but rather artificial intelligence is just another technology that every company throughout culture is utilizing in some way or another, just like every company nowadays is utilizing the Internet.

So, there's going to be companies that come around that are utilizing artificial intelligence that don't even exist yet.

When you look back at some of the primary Internet companies, I guess you would call them services that they're offering go through the Internet, but they're not Internet companies per se, whether it's search engines or social media. They utilize the Internet, but they are not solely Internet based companies.

They're just creating a service and a product offering based off of that technology and artificial intelligence is probably going to be the same way.

 

SCOT:

I mean, A.I. is definitely everywhere. It's got to be part of your overall investment strategy. But I would say I think you do have to consider what the implications might be to individual companies, individual businesses, especially if you own if you've got a high concentration in an individual stock, right?

Does a company like Google have increased risk to their search engine dominance because of what can happen with A.I.?

Does Microsoft have more potential because of their copilot product?

Who are some of these leaders? You know, I think that with A.I., you're going to need companies that have a budget to make an investment.

And so some of these bigger companies may stay bigger. And what we've seen even this year is some big divergence in which companies have been doing well and which ones haven't.

So I think it's important just to add that when you're thinking through your investment strategy, how it might impact what you're looking to invest in, and certain sectors may be taking advantage of that technology more than others as well as certain companies. So have it inform your overall opinion, and overall investment strategy.

 

STEVEN:

Our next story, the February jobs report came out showing that the unemployment rate moved higher to 3.9%. So, is some cooling of the job market a positive or a negative development for the market as a whole?

SCOT:

I think cooling of the job market is a definite positive. Too tight of a labor market has really contributed to inflation. So the fact that it's cooling I think is good. I think it's more likely the Fed's going to cut interest rates second half of the year with a cooling jobs market. What we also saw as not only was the unemployment rate creeping up, but they revised their previous job reports.

I think 10 of the 12 past reports have been revised. And so that job market definitely has been cooling.

I think it's a positive. Murph, what do you think?

 

STEVEN:

Yeah, I mean, I think everything you said, I agree. I think it's - I want to caveat it with some context that it's very, very, very unusual times that we're in, that rising unemployment is actually a good thing. Typically, when you see unemployment rising, the economy is not doing well. It'll probably have some negative impacts on GDP, earnings of companies, all of which are negative in normal times.

But this is a market condition that's pretty unique.

So yeah, seeing the unemployment rate rise is likely again, beneficial to lowering inflation and therefore the Federal Reserve cutting interest rates. So, if you're a listener and you think, okay, any time I hear higher unemployment, that's good - caveat it with the fact that that might be the case now.

But in normal times and normal market conditions, that's typically not the case.


SCOT:

Perfect. And that's our Money Rundown for this week.

Money with Murph:

SCOT:

Now for our segment, Money with Murph.

 

STEVEN:

All right. So, on this Money with Murph, as Scot mentioned at the beginning of the episode, I did play college basketball. I am by no means a college basketball legend, as he so kindly said. But no, that is not the case. I played at a small Christian university, but I do have a passion and love for the game as a whole.

So, March has become one of my favorite months of the year, solely because of multiple games a day and just the thrill of March Madness and the brackets and the fun that that goes along with it. So, I figured what better way to talk about investing and through the lens of March Madness?

I came up with some different ways that we can interpret March Madness as a whole and how that integrates to your investing in life.

So, I have some points I want to go over.

 

SCOT:

Now before you go in there. I do have to give one point of contention. You may not be a superstar when it comes to basketball, but you can dunk. Double - two handed dunk. I mean, that's something. That's really something.

You're definitely, you're definitely qualified to give us some March Madness insight, how it impacts your money. It impacts your wealth.

 

STEVEN:

Well, I used to be a lot better at dunking, but now that I have some a couple extra pounds and a couple extra years on me, it's a lot a lot harder than it used to be. But I do appreciate it.

So, let's dive into our first one, filling out your bracket. So, when you fill out your bracket, you get a whole wide range of people that go about this, right?

You get people that are just blindly throwing darts and they're just picking teams completely at random. And on the other side of the spectrum, you get people that spend a lot of time researching and putting in the effort to really try and optimize their bracket. And the same thing is true with investing.

We come across people that come to meet with us that have seemingly kind of a random mixture of stocks, bonds, mutual funds, ETFs, whatever it may be, they really don't seem to have any rhyme or reason. On the other side of the spectrum, we do see people that come in that have very, very precise investment plans, investment strategies. So keep that in mind when you're filling out your bracket or you're filling out your 401k allocation, your IRA allocation, whatever it may be, putting in that a little bit of extra effort really can help boost your overall results and help you get a couple more wins in your March Madness bracket.

 

SCOT:

That's a great point, Murphy. I think that you can really be intelligent in how you build out your bracket for March Madness. You can be really intelligent in how you build out your investment lineup too. And so, you want to be smart and intentional and thoughtful. And probably the biggest mistake you can make is be emotional. Now, every once in a while you're emotional about that Cinderella team that’s going to make a run, and you're right. But you can also really be wrong. So, I think it's building out the ideal bracket. Just like building out your right portfolio could take a mix of those things. But being intelligent, being thoughtful about it is important to build out that winning bracket.

 

STEVEN:

Yep. And our next point, risk management and diversification. So, you know, whether it appeals to you or not, some people do enjoy betting on the games, right? So now let me ask you, would a sports gambler put all of their money into one team?

No, of course not, right?

They would spread out their bets across multiple games so they can better manage their risk overall.

That way, if one team that they've bet on doesn't win, it's not their entire pool of investments. And the same thing comes true with investing, right? You wouldn't put all of your funds into one stock, one fund, one bond. You would diversify your risk, spread out your risk across multiple asset classes, across multiple teams to better diversify your risk in your portfolio as a whole.

So that way you don't have concentration risk in only one aspect.

 

SCOT:

I think it's a good point, diversification is important, but it's also important to be intelligent about your diversification. Just like if you were going to be betting on a basketball game, you're looking at what the odds are, what the spreads are. All those different things are being intentional, and you might diversify by picking a couple of different games, but you might not bet on every single game.

I think the same thing in the investing world. There is some smart diversification you can do. I think you shouldn't do diversification only for diversification’s sake, but if you can put a combination of good players on the field and good strategies to work, I think can really benefit you. Help smooth the ride and help you get to where you want to go.

 

STEVEN:

Number three, predicting your outcomes. Now, Scot mentioned this before. No one has ever put together a perfect March Madness bracket. Everyone's going to be bound to make incorrect choices. It's just a fact of life.

You can do as much research as humanly possible, and yet some of your choices are still just going to go against you.

And that's going to be the case in your March Madness bracket or in your investing journey.

Whether you choose a well-known bluechip companies that you would think are very, very safe, there's been countless examples throughout history and recent history that the safest investments, as much research as you do behind it, there's always going to be something that has a poor outcome.

This kind of does go hand in hand with the previous point of diversification but knowing that no matter how much preparation you do, there are going to be some duds in your portfolio and in your March Madness bracket, that's okay. And that is just part of the game.

 

SCOT:

And I think it goes back to a great point, Steven. I think we talk about this all the time in our office is what are the things that we know? What are the things that we don't know? What are the things that we can control? What are the things we can't control? Some of the biggest mistakes I've seen people make is they fall in love with a stock and they let it become a massive part of their portfolio.

And some unforeseen risk puts that portfolio and puts their financial life at risk. So, you've got to be careful and know that, just as you mentioned, as much information that's out there, we think we can know so much. But there are things that we can't know, there's things that we can't predict. And so, there are things you can do to systematically reduce the risk in your portfolio, reduce the risk in your overall plan.

It doesn't mean you can't have a high concentration in certain positions, but you do. If you do, you've got to pay extra careful attention and monitor positions. If something does change in mania, take some action to reduce risk in your portfolio.

 

STEVEN:

Number four, emotional discipline. So most successful athletes at any level in any sport, all share significant strength in controlling their emotions. So that's especially prevalent in March Madness when you have tens of thousands of college kids screaming at you, trying to rattle you, trying to get into your head. And yet these athletes are really good at blocking out the noise and focusing on the game ahead of them.

The same thing holds true with some of the best investors. They're able to decipher what really matters to their investments and what doesn't. And they understand that the vast majority of news out there is really just fluff, a little bit of fear mongering and doesn't actually pertain to their investments specifically.

Now, there are some things that can be important to be aware of, but understanding in the world of investing, there are news outlets, articles, someone tells you at the coffee machine, you know, I heard this is going to happen.

That's going to happen. The vast majority probably isn't really going to make a material impact in your investing journey, just like the way a bunch of 21 year old college kids yelling at a player on the court actually makes no impact on that player's life or skill set in the game. They are able to set that aside and focus solely on what's ahead of them.

 

SCOT:

Emotional discipline is huge in investing. It's one of the biggest determining factors. If you're going to be successful as an investor, especially if you're doing it on your own. It's one of the biggest reasons why a retail investor often lags the market significantly because they are emotional. So, learning the skill of tuning out that noise is important. There are things that will happen in the world that you have to take action on. When the Fed is telling us that they're going to be raising interest rates, it's not the time to be passive about your bond portfolio. You’ve got to pay attention because that was real news. On the flip side, every headline that comes across your computer screen isn't something that you necessarily need to take action on. So, understanding the difference between those fundamental shifts in the market and the economy and when it's a risk on and a risk off environment are important and it's important to not be emotional on those decisions, but be deliberate and be intentional, be intellectual when you're building out that strategy.

 

STEVEN:

The joy of winning and the pain of losing. So some of the reasons that people love March Madness so much is it delivers every year without fail, absolute crazy buzzer beaters and heartbreaking losses. So it can play with our emotions rapidly and make our heart skip a beat. Take a couple of years off of our life. Now, some people, like my own mother, loves to close her eyes during the moments of intense game because she just can't handle the suspense. in a sense. It's very wise of her to do so because she understands what she can and she can't handle. And investors need to be the same way. It's okay as an investor if you can't handle a massive amount of risk and volatility. Some people have stronger stomachs than can handle the ups and downs of the roller coaster of the stock market, and others don't.

But understanding what you can and can't handle, making sure your investments are hitting your goals and then really understanding beyond that, am I taking on too much risk or too little risk? It's okay to not have a lot of volatility in your portfolio, but as long as you are aware of the returns that you're projected to get, of making sure your long term goals are hit, as long as you have some self-awareness about your risk tolerance, that's all that really matters.

For some, they love the thrill of hitting a homerun investment, while with others the pain of loss is simply just much stronger than the joy of winning. So making sure you protect yourself from downside exposure is incredibly important. But doing so while you make sure that you have enough of an investment potential to hit your long term goals.

 

SCOT:

Steven, I loved your example of your mom closing her eyes during those moments. I've had coaches that had done the same thing. I had a mock trial coach that couldn't bear to watch in a competition.

But you know, when you're talking about basketball, closing your eyes for that big shot or that last minute thing that happens, you know, I think it's important to make sure you don't have your eyes closed all the time.

It’s important to make sure you don't have your eyes closed for the whole game or the whole weekend of games, right? I think not being aware of anything ever doesn't make sense. But I do think it's important. It's important to have a conversation with clients. How often are you looking at your account balance? How often are you looking at your statements?

Because sometimes it does pay if you know that you have the right strategy and stay the course with that strategy. But at the same time, there does need to be an intellectual exercise of evaluating if that strategy is the right one to continue. There's a big difference between being emotional and being intellectual, being intelligent about how you're making those decisions.

But there is some value. I met with a client this last week that said, you know what? I just stopped looking at it as much because the daily ups and downs drove me crazy. And that's okay as long as you still have a scheduled interview, if it's once a year or if it's once a quarter for you to evaluate.

I think people do make mistakes if they go if they go multiple years without evaluating if they're still on course. But I think it's important to understand yourself as well in order to be a good investor.

 

STEVEN:

And our final point is great coaching. So March Madness, the tournament starts out with 68 teams and certainly some teams are going to come in with better coaching staffs than others.

Those great coaches, they have some incredible talent, but also some incredible work ethics. They're always improving. They're adapting to how the game is played. They're great leaders.

They can take their teams through proper preparation, proper practice and guidance through tough times, because inevitably every team, no matter how good or talented, will have some tough stretches. So just like the great coaches in the game of basketball, there are great coaches in the world of investing and finance. And so it's very, very important that you have a great coach on your team, someone that will properly position your finances, have the highest likelihood of success and someone that will be there for you and be a great leader when times are tough. The combination of talent, hard work, and leadership really can't be beat in both March Madness as well as in the investing world.

 

SCOT:

Great coaching is so important. It's important in your personal life, in your marriage, and raising kids is important in the world of investing. And I think it's a great example of March Madness. If you're a great coach, you're not just coaching one piece of a team, right? You're not just coaching and practicing about being a great, great three-point shooting team.

If you aren't coaching around great defense, you're not going to win a title, right? You have to be comprehensive in your coaching. And I think that's one of the things that's lacking with a lot of investment coaching and investment management. It's all investment related. When really to build out a plan, you got to be more comprehensive. How do taxes fit in your situation?

How does risk fit in? Your investment makeup? But inside of investments, what can you do to optimize your estate plan? All those different things are part of a good coaching. Then ultimately, what are your goals, your objectives and how do you marshal your financial resources to accomplish what you want to accomplish in the most tax efficient way? So, I think good coaching also applies in the financial world, no question.

 

STEVEN:

So those are the six commonalities I have between March Madness and investing. I bet some of you thought there's no way that Steven will be able to share some points on how March Madness and my portfolio come together. I think it's interesting to see the more experience that people gather, the more they can kind of realize the psychology of life. The commonalities of life can be seen in very different and seemingly uncorrelated areas.

So later this month, if you're sitting on your couch watching some games, thinking about what you're observing with the kids heckling the players, with the great coaching staffs, the rush of emotions, really kind of take that, be appreciative of it, and think about how that correlates into your financial and investing journey as a whole.

 

SCOT:

And that's Money with Murph. Thanks, Steven.

 

STEVEN:

Thank you.

Listener Questions:

SCOT:

And now for our listener questions.

If you want your questions answered during the show, go to our website. RetireEWO.com, and click on “Ask a Question”. Steven, you've got our first question?

 

STEVEN:

Yep. Todd from L.A. writes, Where do you see interest rates going over the next 3 to 6 months? Great question, Todd.

 

SCOT:

3 to 6 months, it's going to be hard to project. I mean, I think the Fed's likely going to start cutting interest rates after June. You're going to see a number of cuts, probably three before the end of the year. But the market has already priced in some of those cuts already. So you might not see a bunch of movement in interest rates because it's been priced in already.

But I would see some of a decline probably starting after three months if the Fed continues on that trajectory and they start to project where rates are going to go in the future, they're going to start looking at 2025 and see if those rate declines are going to continue. Now, a lot of people have an interest in rates coming down.

One of those big interests is the federal government. The cost of our debt is so expensive with where rates are at. I think if inflation stays under control, the Fed is going to start lowering interest rates. They've told us where they want to be - a target closer to about two and a half percent. So I do think you'll see a steady decline in rates if inflation can stay tamed.

So I'd say probably no change in the next three months, 3 to 6 months, probably a minor decrease in rates, not huge. And then I think that continues second half of the year into 2025.

 

STEVEN:

Yeah, and Scot, I can't agree more and I just want to echo that with maybe the 3 to 6 months on a time frame for an investment decision might be a little premature.

Scot already touched on the market has had a really good - really at this point probably 14-16 month stretch and that has been in anticipation of the rate cuts.

So trying to time a 3 to 6 month rate cut might not be the wisest really, because that timing should have come over a year ago at this point really. So while, you know, it does have a massive impact on our life, if you're looking to purchase a home purchase car, whatever it may be, just keep in mind that it's going to be a little hard to predict over the 3 to 6 months.

Approaching our first rate cut already kind of in this March, April timeframe.

So just keep in mind, don't put too much weight on any one decision on what you think Jerome Powell and the Federal Reserve will do over the next 3 to 6 months.

I think the only other thing that is relevant, Steven, is in your bond allocation. What's the bond allocation that makes sense? But we do see where things are trending. I think that's more important about the precision about when rates are cut.

 

SCOT:

Next question comes from Nancy from Long Beach. She writes, A.I.? Where should I invest? Steven, you want to take that?

 

STEVEN:

Yeah, Nancy, great question. We already covered that for a good piece in this episode, so I’d encourage you to go back and take a listen. But to answer your question directly, where should I invest for A.I.? There are a lot of companies that have their stock prices have soared due to artificial intelligence.

There are some different ETFs out there if you want that precise.

There are some artificial intelligence ETFs, but I think artificial intelligence is going to be a lot more applicable in places that you may not realize. For instance, there's a lot of hype around a tractor company out there and the integration that they're using with artificial intelligence, and their tractors and their combines to help automate farming. So that's just a small example of some ways that you can use artificial intelligence in ways that you might not think about.

Earlier in episode, I touched on artificial intelligence I think will be a lot like the Internet, probably a little bit more rapid of a adoption mainstream than the Internet was.

But it's really going to just impact our lives as a whole. So just like there's not really a ton of strictly Internet based companies that have done well that are pure Internet providers.

There's going to be companies that use artificial intelligence for their own benefit in ways that we probably haven’t even thought about, right? I mean, when you look back at the Internet, some of its main impacts were social media companies, and those came around the late 2000s. Probably ten, twelve years after the Internet really became mainstream. So just like artificial intelligence, there's going to be just like the Internet, I should say artificial intelligence is going to be a part of every company in some aspect or another.

So you're going to get benefit of that no matter what feeling you have.

Generally speaking, whether that's the S&P 500 as a whole or some specific companies, artificial intelligence is going to probably streamline the companies that you hold in one way or another for your benefit, and for the company's benefit as well. Scot?

 

SCOT:

So Nancy asked, A.I.? Where should I invest? How I'd answer that, Nancy, is I think you want to be looking at individual companies that show a path to profitability from A.I. that's going to be swift. The companies that have been moving the highest as of late are ones that have proven and demonstrated that they can show profitability from their integration with A.I.

I think you have to be careful with companies that are losing money. And just know that companies are going to need a lot of capital and investment to be able to profit from the latest and greatest tools that are going to be out there from A.I. Steven makes a great point that there's going to be broad applications and this is going to be a long cycle thing, but just like the Internet, there were big winners and losers.

If you bought in 2000, the best answer wasn't to buy every Internet company. I think the same way in A.I. is not to own everybody with A.I. in their name, or everyone that's talking A.I. I think you need to be more intentional. Look for those ones that are going to have broad profitable appeal. That would be my best advice and be very careful of manias.

Be very careful of mania investing, stock prices that are way up for no reason. Look at companies that are way up because they've shown the profitability or fundamental outlook on where they can move the business.

 

SCOT:

Our next question is from Donna in Anaheim. She writes, I'm a teacher and I have a pension I'll get when I retire. I read about something called windfall elimination provision and that it will hurt my Social Security if I have a non covered pension. How do I know if I have a non covered pension? Steven?

 

STEVEN:

Yeah, great question, Donna. So when you say you're a teacher, I presume you're part of CalSTRS. You are a public school teacher, not a private school teacher.

But that aside. So non-covered pension is simply saying you have a pension from an employer where you did not pay Social Security taxes.

So that's pretty much, by and large, just a public pension.

That will be a you, if you’re a part of CalSTRS, Non-covered pension, you did not pay into Social Security. So non and not, not the most perfect little word play there, but NON, NOT. The way to remember that you have a non-covered pension if you did not pay into Social Security and yes, CalSTRS does not. So I assume that you have a non covered pension and that when you do receive your pension in retirement and if you do have any Social Security benefit of your own.

Yes, it is true that windfall elimination provision will reduce that. A couple things to keep in mind, windfall elimination provision cannot completely reduce your benefit and it's a relatively complex calculation to figure out what that will be. Set up a time, we're able to help you walk through projections on what your Social Security will be, and then what that WEP elimination, that reduction will be onto your benefit.

 

STEVEN:

All right. Our next question, Dennis from Orange.

He asks,

My Social Security has been increasing over the past few years. Should I be concerned about if Social Security cuts are on the horizon. Is there anything that I can do about it?

 

SCOT:

Dennis, thanks for the question. I get this question a lot. Is Social Security going to be around? Am I going to still keep getting payments? What about if they make a cut in the future? You know, the question is, what can we control and what can't we control? What I would tell you is that I think it's very unlikely that there is going to be a significant cut to Social Security for people that are receiving benefits now.

A couple of reasons is there's a few easy fixes I think they're going to make. They're going to raise eligibility age for younger workers. That helps fix the Social Security issue pretty quickly. They could make adjustments to the inflation calculation and they could do some means testing. So if your income is over 500 grand a year, you definitely would be in the crosshairs.

If your assets are over 5 million, you'd be more in the crosshairs. So means testing is something that could impact higher net worth and higher income earners in the future, but likely the most likely outcome is that they're going to impact younger workers with raising eligibility age. I wouldn't be super concerned about it. If you are concerned about it, the other thing you can do is through a financial planning process, you can stress test those scenarios.

What if Social Security was cut by 25%? What if it was cut by 50%? Where would we pull from and when? A part of our financial planning process is stress testing those types of scenarios. So that's something that we could help you with.

 

STEVEN:

Yeah. And Scot, I just want to add something to that. I think something to keep in mind is whoever is in the Oval Office, in Congress, if you are in office when there were Social Security cuts, that's pretty much a political suicide. That's going to be a stain on your reputation that you probably will never be able to get off.

So just natural selfishness of humans and their reputations, it's going to be very hard to pass cuts to Social Security just for their own selfishness and desire to make sure that they stay in office, at a 30 trillion deficit already.

What's another couple trillion, right?

So, I wouldn't be too concerned about it. I think Scot hit the nail on the head that younger people that are still decades away from Social Security, they should have some concerns. But yeah, people that are already receiving it, probably is not worth your stress.

 

SCOT:

And as you mentioned, Steven, I think with the debt that we've accumulated, the government and politicians have had a very difficult time cutting anything. I think there's a lot easier things for them to cut before they cut Social Security. Democrats and Republicans have been pretty united in knowing that it would be political suicide. So there's a lot of other things they likely could cut in other ways that they could tinker with the calculation before they overtly cut Social Security benefits.

And right now, we're printing over a trillion dollars more that's coming in in revenue. And yet the value of the dollar has stayed strong. So they haven't been penalized because of how they're spending.

 

STEVEN:

Next question.

Mary from San Clemente asks,

Why has the market been so strong this year when there is so much to be concerned about in the world with Russia, Ukraine, the Middle East and elections coming up later this year?

 

SCOT:

Mary, thanks for the question. I think it's important to remember the market is not the economy and the economy is not the market. And one of the things that I would say is that the international conflict that has been going on, even though the human toll can be gut wrenching to watch and to see, from a financial aspect,

we've not seen a contagion effect. We haven't seen what's gone on in Ukraine and Russia impact the global economy or even the Middle East in a significant way. Now, in the Middle East, we were concerned with the Red Sea. Is there going to be some disruption to oil prices? We haven't seen that be impacted either. Oil prices are very reasonable considering the tensions that are going on.

So just like when we think about politics and elections, often there's opportunities to make money regardless of who is in power and regardless of the outcome of elections. And our biggest job is to determine, kind of sift through the - sift through the noise, what are the things that impact your pocketbook and impact the bottom line as an investor?

Same thing happens with international conflict. Run of the mill normal regional conflicts that don't expand to be wider issues. Those are things that often the markets can digest and deal with. The markets don't like uncertainty and unknown. And the more that something like that Russia-Ukraine is now two years in, we kind of at this point, the impact has been dealt with through the financial system. And so that's one of the reasons. And then there's a lot of - there's been a nice steady slog higher over the past couple of years in the market. Why is the market higher? Earnings for companies have been growing, profitability of businesses has been going higher. And that's been a big reason we've seen these markets march higher.

Outro:

SCOT:

That's our show for this week. If you want your questions answered during the show, go to our website, RetireEWO.com and click on “Ask a Question”. If you want to sit down and talk more about your situation one on one with myself, with Steven, go to our website and click on “Schedule a Consult”.

We'd be happy to help and sit down one on one with you. Go “like” us on Facebook to get our most up to date content. Find this on X. Subscribe to our podcast. We'll see you next time when I'll show you how to retire with your eyes wide open. Don't go into retirement with your eyes closed. Go into it with your eyes wide open.

I'm Scot Landborg, with Steven Murphy. Thanks for joining us and we'll see you soon.

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