2022 Midterm Election Market Update for Retirees

On Wednesday, November 9th, 2022 at the Morton Arboretum, we had about 120 of our clients together for an educational talk. This quarter’s talk was a post-election market update, as the day before, Tuesday, November 8th, we had our 2022 midterm elections.

The election results have some impact on retirees, and we wanted to give timely information about that impact, some of the greater economic issues that had to be addressed, as well as specifically how they applied to retirees.

My presentation is about an hour long, and I hope you enjoy it! If you have any questions, you can schedule a 15 minute call with me using my calendar below this video. Thank you, and I hope you enjoy our talk from The Morton Arboretum!

Josh Bretl:

Hi, this is Josh Bretl with FSR Wealth Strategies. And last Wednesday, November 9th, at the Morton Arboretum we had about 120 of our clients together for a educational talk. We do these every quarter, and this quarter’s talk was a post-election market update. On the day before, Tuesday, November 8th, we had our 2022 midterm elections.

And that has some impact to retirees. We wanted to be able to very timely give people some information about some of the election impact, some of the greater economic issues that had to be addressed as well as specifically how they applied to retirees.

So it’s about an hour long. I hope you enjoy it. And if you have any questions, of course, there’s always the option you can book a 15 minute call with me right below this video. Thank you, and I hope you enjoy our talk from The Morton Arboretum.

I think it’s fascinating. If you were to look at my Instagram or my social media, you would see I follow all sorts of chefs and restaurants and every local Chicago media personality. I’m fascinated by it. I love Ron Magers. Well, I love watching him I should say. My wife still makes fun of me because I didn’t cry the day we got engaged but I cried the night he retired because his speech was so good. Now, Ron Magers and any other quality newsman or newswoman loves election night. It is their Super Bowl. They have those headsets on, they go to every single location and you can tell this is their night. They are super excited by this.

Now, last night I watched a little bit of the election news. I know my parents. I’m sure a lot of you were watching the election news. It’s something that it’s kind of like a good movie. It just keeps me up way too late at night so I know I have to turn it off. But one of my high school best friends, my college roommate Brian, I talk to him every election night. It’s almost to get dorky into the analysis of it.

Now, Brian was an options trader for 10 years out of college. Quite successful at it. So he likes to gamble. And he points out to me that there is a website out there that allows you to gamble on the election outcomes and it’s run by options traders. He says, “Options traders don’t like to lose money. So this website’s pretty darn accurate usually.” And he watches it up and down and it is a lot of fun. The websites PredictIt if you have any interest in it. I won’t put money in it cause I don’t know how it works, but PredictIt. Yesterday afternoon at four o’clock, he and I were on the phone and he says, “Pull this up,” and he is walking me through it. “And if you looked, there was an 80% chance that Republicans would take the Senate, a 90% chance they’d take the House and they had all these percentages and all these different things all the way down to the point they were predicting who would be the presidential nominees down the road.” Well then I woke up this morning and it looked a lot different.

Now my wife runs and plans all of these events for us. And she writes the emails that you get. And when I told her what I wanted the topic of tonight to be, she says, “Are you sure? You’re going to have an event about the election the day after the election? Do you remember how long it took the last one to be settled?” Well, lucky for us she also added in there we’re going to do an economic update and how it impacts your retirement. So that was good too. And then I found I think is the most appropriate graphic to describe the election outcome. This is my favorite election graph.


I love it. It’s probably accurate.

Josh Bretl:

It’s probably pretty accurate.

Now I told this story earlier. Dave was with me all afternoon in my office, he was with me. I don’t usually get nervous before these events. I do these enough. I was really nervous today. In fact, I’m kind of shaking a little bit up here, which is somewhat normal. But I think the reason was that I was literally writing this this morning, and for two reasons. One is we had data actually to go off of. And two was the fact that I was waiting for some economic inputs from my father who spent the last three days down in Austin, Texas with a lot of the economic leaders and the chief investment officers that we listened to. So I was waiting for him to come back and we were compiling all this stuff.

And I joked with him, I said the last time was this nervous was Halloween day because that was the day I got to read to my daughter’s first grade classroom. So once a year they allow a parent to come in or every parent to come in and read to the kids. Now, I speak for a living. I speak couple times a month, no big deal. I got to her school half an hour early. I sat in the parking lot and read out loud the three story books that I have read hundreds of times because I was as nervous as I’ve ever been to talk to six year old girls and boys. But it went well. So hopefully tonight does as well.

A little disclosure. We put this up there every time. And I want to say tonight more so than ever, this is really important. Everyone in this room is in a different situation. If you are a client of ours, we’ve worked really, really hard to put you what we think is the absolute best situation. I’m going to show you numbers and data tonight that you may not like and you may want to make rash decisions. This is just for your information. It’s not advice. We will be happy to give you any advice. That’s what we do. But let’s talk about that one on one. So that’s where our disclosure comes in here.

This is my daughter. This was taken right before Halloween. My daughter was chosen as star student last week. Now, star student as a six year old is a big deal. They pick your name out of an envelope and that’s where you get to come up and write your name and you talk about yourself. She had to create this poster. Well, she found out Friday afternoon that she was star student. My wife just happened to be busy that night. And so I had the kids. Now, my daughter completed this entire poster all by herself in the hour and a half before she went to bed. And she was very proud of it and I was very proud of her. My daughter is an amazing human being. Anyone who’s met her can attest to the fact that she will change this world. And what I always tell people is I hope it’s for the better and not the worst, because she is an extremely powerful, wonderful, amazing little girl.

She has dreams that we all dream. Last night at dinner she says to my wife and I, or all of us at the table, “Has there ever been a woman president?” My wife says no. She goes, “Well, I’m going to be.” And it was dead silence. She meant it. She’s an amazing child. Everything is big. There is no small idea with her as there should be with a six year old. It’s wonderful to see that.

Now, something I’ve noticed as I’ve talked to clients over the last two years, there’s been a mental shift. There’s been a mental shift away from dreams. There’s been a mental shift towards fear. There’s been a mental shift towards survival. This is retirement. This is the best time of your life. This is what you’ve been dreaming for. This is what you’ve been saving for. This is what you’ve been gearing up for for the last 40 years.

So we did something different tonight. When you walked in, everyone should have been given a little note card that says, “My dream is…” Big or small, it doesn’t matter to me, but I want you to spend the next minute writing that down. It can be a dream for the next six months. It can be a dream for the rest of your life. It doesn’t matter. Write one. Write five. It doesn’t matter, but I want you to write it down. If you’re brave enough, you can put your name on it at the bottom. I’m not going to force you to do that. And if you will, we’ll ask you to turn them in on your way out. Again, no one’s going to force you to do that either. But we’ll collect all these. We’ll have them in all of your files. And if you give us permission, we’ll probably even put it up in our office because I want you to see what we’re working towards.

We’re going to talk about your finances tonight. Your finances are not a piece of art. They’re not something we stick up on the wall and we look at and say, “Oh, how pretty.” They serve a tool. They serve your dreams. So I’m going to sit here and be silent and get a drink of water for one minute and write those down.

Now, what are the two things you’re not supposed to talk about in a large group? Religion and politics. Well, I’m not going to talk about religion tonight, but let’s talk about politics. First, a quick disclaimer. There are people in this room who are as far left as left can get and there are people in this room who are as far right as right can get. So tonight is not a political statement. Nothing I am going to say has anything… There is my opinion in it, but it has nothing political about it. It is all about how this outcome will impact you, the retiree. So that is my little disclaimer as we go into this.

Now, there’s a lot of confusion. There’s a lot of what if out there. And now a few things we’ve talked about leading up to this, this is something that’s not new, is how midterm elections generally impact the market. Midterm years are usually weird years.

So let me explain this graph to you really quick. This top line is a month by month cumulative return of all other years, all non-midterm years. So if you look at it’s pretty literally straight. I mean, it’s got lots of ups and downs, but every month is a slow increase. That’s normal. On midterm years, every four years, the first nine months are pretty much flat to choppy, almost to negative. And then post midterm is when they earn everything back. That’s a normal midterm year.

Now, every midterm year is different. This is midterm years going back to 1962. All sorts of crazy things have happened back then. Now, the average first nine months of those years has been a negative 6.2%. Non-midterm years don’t have that. But the last three months have been a positive 6.2% on average. They net out to pretty much zero.

So what does that mean for us? What do we know? Now, I stole this from some websites this morning. There’s a lot we don’t know. There’s a lot that I’m not going to be able to give you definitive answers on. But here’s what we know. We know that our president for the next two years will be a Democrat. We know with fairly certainty that the House of Representatives were controlled by the Republicans. Where the Senate goes pretty much is up in the air still right now. So what does that mean? That means we are going to have split control of Congress and we are going to have a Democratic president.

Now what does that mean to you? Well that means there’s going to be gridlock. That means no major legislation is going to have a chance of getting through Congress to be signed by our president unless it has a major bipartisan support. Gridlock, the markets like. The markets generally like the fact that there’s certainty. There’s not going to be change. They can play by the rules that they have right now.

If you look backwards on some major midterm elections that had big swings, the first one I want to look at is the Clinton years in ’94. The midterm elections in 1994 was the first time in 50 years that the Republicans took control of both the House and the Senate. And for the remainder of the Clinton years, from ’94 to the end of his presidency, they averaged 20.7% return on the S&P 500 year over year over year. And that’s with a “gridlock.” In the Obama midterm from 2010 when the Republicans increased their lead drastically, the S&P went up 13.3% every year till the end of his presidency. Those were very different times.

In 1994, the consumer price index, which measures our level of inflation, was at 2.7%. In 2010, the consumer price index was 1.1%. Today it comes in over 8%. We’re in a totally different world. There’s an earnings issue. Now what does this mean to you? If you’ve heard me talk over the last year, you’ve seen this airplane picture. I think it is my favorite analogy, thank you John, that describes how we think about your finances in retirement. There’s all sorts of outside variables.

Now, if you look at this airplane, there are controls that nobody really in this room has any idea what they do because I don’t think we have any pilots, but there is something measuring speed, there’s something measuring how far up and down you are, there’s [inaudible 00:14:19] where the wheels are going. There’s communication to the outside world. There’s weather inside of here. Heck, there’s even a printer in there they can get information from. They have a phone, they can talk to the back and see how the unruly passengers are doing. And in order to land this plane safely, whatever the destination is, all of this stuff has to work together. These pilots have to be highly trained, have a plan, have it executed to a tee so that you get there on time safely.

In retirement, it’s kind of like this. You’ve got Medicare, you’ve got Social Security, you’ve got your spousal, you have your 401(k), your IRA, your Roth IRA, your mutual funds, the stock market, the tax rates, the capital gains rates, you have the outside inflation. All of these things need to be worked together. So what I’m about to show you is just part of this. You have to take everything into consideration. We’re going to talk a little bit about the market.

Now, for a lot of you in this room, if we’ve worked closely together, we’ve positioned you for times that we think are coming. But there’s a subset here that may have opted for more risk and I just want you to know what’s coming down the pipe and that there’s things that we can do about it as we go on here.

Now, as we have some concerns, I want to talk about what they are. And the first is inflation. When I graduated from the University of Illinois in 2003, which was the last time we had a decent football team, I graduated with a finance and accounting degree. I went to numerous classes where we spent days and days on inflation. We talked about the causes, we talked about the impact, we talked about how to stop it. Now when I graduated, I thought inflation would be part of my life that I would have to deal with all the time. Well, you know what? Until about a year ago, we never thought about it. It was a moot point. Well, it’s very real today.

Now how would I describe inflation? Now, inflation was something that I used to have to tell people what it felt like. I’m going to guess every one of you in this room knows right now what inflation feels like. You know what it’s like to go to the grocery store and all of a sudden the eggs are $4 and the milk is a fortune. That’s maybe just my house with the kids in it. But inflation’s real.

Now let me describe inflation because there’s two causes. There’s two sides to inflation. Inflation, if you’ve met me in the office, I will probably showed you a graph of some sort, I love graphs, but inflation is a value of price. Price is dependent upon supply and demand. It’s basic economics. Now, there’s supply and demand of money and supply and demand of the good. So I want you to go in your imaginary space and I want you to think that about this imaginary world. And in this imaginary world, the only thing you can buy is an apple. There are 10 apples, they’re all identical to each other. That’s all you can buy. That’s it. The only money in this imaginary world is a hundred bucks. That’s all there is. There’s $100 and all you can buy is 10 apples. How much does an apple cost? 10 bucks. Makes sense. Well, one way that prices go up is we can increase the money supply. If we maintain a constant of apples and all of a sudden we have 200 bucks, how much does each apple cost? 20 bucks.

Now the other opposite is true. We could keep the money supply the same and decrease the amount of apples. Again, prices go up. Here’s the worst case scenario. We increase the money supply and we decrease the goods. Well, what’s happened this year? Dave, I know you’ve dealt with shipping overseas and supply chains. I’ve heard stories of the horrors of ships sitting out for miles and miles in the ocean. I’m doing remodeling on my house. I bought appliances in December and they haven’t been delivered yet. There’s all sorts of supply chain issues. Some are getting better, some are getting worse. Money supply.

My father was just at this conference I was telling you about and he heard the chief economist for First Trust speak. First Trust is a gigantic financial institution. And Brian Wesbury is the guy’s name. And as he said, in the last few years there has been a 42% increase in our money supply. 42%. That’s a massive increase. And at the same time we’ve talked about our supply, our supply has gone down drastically. Why do you think we’re seeing inflation? Now, this here, this graph, this comes from Lincoln Financial. This is a measure of spending versus GDP. So if we look here, federal net outlays are the red graph along the top. And the orange graph along the bottom is our federal receipts as a percentage of GDP. So the money coming in is not near what’s going out. And that’s been the case for a while, but you can see the spike we’ve had in the last year.

Now what are they doing to combat this? The Federal Reserve right now is raising interest rates. They’re raising interest rates like crazy. Now, good or bad, is this going to help by decreasing the money supply or increasing the amount of goods that we have available to us? I don’t know. The Federal Reserve seems to think it is. But what are they doing here? They are raising interest rates at a lightning fast pace and even to their own standards. They have underestimated this time and time and time again.

And if I look here, I’m going to show you over here on the right, this is kind of interesting. Back in December of 2021, the first time they talked about inflation, they said, “We’re going to have to start raising interest rates and I think we need to get it to a level of 2.5%.” And then in March they corrected themselves and they said, “No, that’s too low. We’re going to need 2.75.” And in June they said, “We’re going to need 3.75.” And finally, recently they said, “We’re going to need 4.63.” Well, the last rate increase they just had puts us at a 3.75% for the year.

To put that in perspective, to put that in perspective, our Fed funds rate pretty much hasn’t gone up or down by 25 basis points in the last five or six years. And normally when it goes up, it goes up by 0.25 or so. This is a huge increase. So what does this do? This is designed to slow spending. This is designed to be painful in a way. And what this does, if we look here, this is showing our prior GDP growth to what’s projected in the future after these increases. This I don’t think is going to change our money supply. There’s ways that they can do it. I don’t know if this is it. But it is going to hurt a little bit. And it’s not just going to hurt you, it’s also going to hurt companies. It’s going to hurt corporations. It’s going to hurt their bottom line because what this does when they do this, when they raise the Fed funds rate, that’s not the rate you pay. It’s not even the rate giant corporations pay. The Fed fund rate is the rates that banks pay when they borrow from each other.

A bank considers another bank to be the safest place humanly possible to borrow money from besides the US government. So companies borrow at a higher rate and individuals buy at a higher rate than that. So what happens is as they raise these rates, as they raise these rates, it also raises the rate that corporations pay and you and I pay. 30 year fixed mortgages right now are going over 7%. So when a corporation who relies on debt, and a lot of them do, it’s going to increase their expenses. Is it going to increase their revenue? Probably not. So when you have no increase of revenue and you have an increase of expenses, you have decreased earnings, that’s a problem. That’s a problem.

Now this question, if you watch these news channels, it gets battered about all the time, and that is, are we in a recession? Are we in a recession? No, according to the people who get to decide this, and I always wondered who that was. It is the National Bureau of Economic Relations. They have six underlying variables that they look at to determine if we’re in a recession. One of them is negative right now, the other five were all positive.

Now, you don’t have to have all six negative, you don’t have to have a majority even. The last recession we had was March or started in February of 2020 and ended in March of 2020. It was a two month recession. It was the shortest on record, and that was because that recession was so drastic and so extreme that it had a major impact across the entire economy. So are we in a recession now? According to them, no. According to them, we are not in a recession. Does it still hurt a little bit? Yeah, it hurts.

Now, my father stepped out of the room, but every economist that spoke over the last few days said a recession is coming. It might be the next six months, it might be the next 18 months. What does that mean? Well that means we’ve got pain in our economy. And I had him to describe to me kind of like this, if you were in a car accident, a bad car accident, and the ambulance rushes to the scene and they say, “Hey, you’re kind of beat up. We got to get you to the emergency room. But you’re in a lot of pain,” one of the things they’re going to do is they’re going to pump you full of morphine to make you feel better and help numb the pain.

When you get to the hospital, the doctor’s going to say, “How are you doing?” Well, you’re full of morphine. You might say, “Hey, I’m pretty good.” But the next day you’re not feeling quite as good. And two weeks down the road as you’re going through your first physical therapy, you’re really miserable. It’s kind of what we did here with the pandemic. The pandemic was a massive car accident. This is a life changing event and we shoved morphine in our system at a rate that was unfathomable. The word unprecedented gets thrown around a lot and I don’t really believe the word unprecedented, but as far as government spending goes for United States, that was an unprecedented level of government spending.

If you remember back to the Obama bailout days where the tarp was being battered around, do you remember how big the tarp bailout was? That was $350 billion. They wanted 450 but they thought that was too much so they didn’t give it to them. They debated the tarp bailout for 11 months before it was passed. In March through the end of the year of 2020, the Congress put in place over $3 trillion of extra spending. That’s a huge number. That’s a big increase in our money [inaudible 00:27:08]. That was the morphine that got pumped into our system. And we’ve come through it pretty good. 2020 turned out to be a great year. 2021 was a fantastic year. That’s out there.

I don’t usually use notes when I give talks, but I really needed to today. And now I’m completely lost in where I was here. So bear with me for a second. Now, are we in a recession? The average recession has a decrease, a downturn of 30.77%. This number comes from October 31st. Our market was down around 25.25%. We’re not quite there yet. We’ve had some big drops. 2007, 2009, 57%, 48% and a 73%. We’ve had some smaller ones too. They’re all there.

But the next question is how long does a recession last if we go into one? The average length down at the bottom is 13 months. Average length of 13 months. We’ve had shorter, as in 2020 where we had two months. We’ve had longer like the Great Depression, we lasted 43 months. We don’t know how long it’s going to last. We hope it comes out quickly if they can get inflation in check. We have a large amount of cash reserves, we have low unemployment, we have a lot of good variables going on right now, but there’s also the bad.

Now, the other problem we have is you don’t always bounce back at the same rate or the same level. It can take a long time to get that money back even after the recession is over. Now why do I say all this? A few months ago, we were in the same room and we were talking about this book by Morgan Housel called The Psychology of Money. To this day it is still one of my favorite financial books. If you haven’t read it, we still have some extra copies in our office. We talked about the emotions underlying investment decisions. We’ve said over and over again in this room that we are not market timers. But most of you in this room have retired in the best possible market in all of history.

And I say this at my public seminars, if you think about the average retiree working, your working years were difficult. A lot of people, you’re raising children, you were just struggling to get by. And then all of a sudden the kids graduated from college. Your income may have not gotten that much higher, but you’re at your peak earning years. Your expenses go down cause those nasty kids get out of the house and you have the ability to save. And you start saving in one of the best markets in history. You retire with probably one of the best markets in all of recorded history. It’s been a great time to be a retiree. Our emotions can sometimes get the best of us.

In this book, they talked about the two major emotions of fear and greed, the most powerful human emotions that we have. Now, fear is what stops us from doing things. Greed is what makes drives us to do more. And as I’m not going to spend the next few minutes telling you, “Hey, we need to make all these major changes,” but what I want you to know is that for a lot of people, especially who’ve gone through what you guys have gone through in the times have been incredible, you feel like a teenager which might be invincible. And I want us to understand a little bit more about what goes into this.

This same quote came out of that workshop. This is the Bill Gates quote, “Success is the lousy teacher. It seduces smart people into thinking they can’t lose.” A lot of the economists that we follow and that we see tell us that we’re in for a different next five to 10 years. Now, for a lot of you in this room, we’ve already taken the steps to secure you against it, it doesn’t matter. But for some people who you’re just trying to eke out those last rates of return, I just want you to know, I think we’ve got a little bit of time, but we want to make sure that your mindset is in check as we go through this. I don’t think we’re going to see the gigantic growth years we’ve seen in the past.

Now I’m going to explain a few things to you why I say this here. This graph is actually in your packet and you’ll understand why because there’s lots of numbers on here that I want to go through. This has to do with sequence of returns risk. Sequence of returns risk is something that you don’t care about when you’re working because it really doesn’t matter to you. But when you retire it’s a huge impact. And let me explain this to you. This is real simple. This came from BlackRock. It is comparing three portfolios. Portfolio A, B, and C, they all average 7%. Portfolio A starts at 22 the first year, 15 the second year, 12 the third year, and -4 and -7 the fourth and fifth year. That comes to an average of 7%. Portfolio B is straight 7% every year. Never changes. Really boring. Portfolio C is the complete opposite of portfolio A. Same rates of return just in a different order.

Now in your working years, if you started at age 40 with a million bucks, it didn’t matter which portfolio you had. When you finished at age 65, you finished the exact same spot. Didn’t matter. But in your retirement years, this matters. Why is that? This matters because like I said before, that money that you have is not a piece of artwork for you to look at. It’s there to serve a purpose to you and that is there for you for your enjoyment and your dreams. And that means you may have to spend some of this money. And if you spend some of this money, this is where the differences can occur.

The green line is self-explanatory, you’re spending more than you take in. The orange line is portfolio A, you actually ended up okay. And the yellow line, it’s identical to the orange line, we just changed the order of the returns. So for a lot of people right now who’ve been really good, I want you to understand that this is out there. We need to understand that when we’re looking at your spending, we want to make sure that you’ve got the money to spend for the next few years. Three to five years from now, the market’s going to be in a better spot than it is today. No doubts about it. What are the next three to five years going to bring? If you were working, it wouldn’t matter because you’d have the income to replace it. But now we actually have to spend some of this money.

Why is this the case? Now, this graph I’ve shown a few times this year. And the more I dig into it, the more I get excited about this graph because it explains things to me that I didn’t understand before. It actually explains that last graph. It explains a sequence of returns risk. And let me explain this to you. I do a lot of meetings with Erin and she makes fun of me. She says, “Nobody enjoys graphs as much as you do Josh.” So if anyone in this room enjoys graphs as much as I do, please tell her that.

Now something that they’ve taught us from the beginning of my financial education is that if you experience a loss, you need a higher rate of return to make up that loss. And it’s pretty simple math. If you have a million bucks, you lose 10%, you lost a hundred thousand bucks, you now have $900,000. If you earn 10% back, 10% of 900 is only 90,000, you’re not back up to that million yet. You actually need a little over 11% to make up the difference. If you lose 20% of your portfolio, you need 25% a little over to make it up. And if you lose 30, you need about 43% to make it up. I always got that. I always understood that.

But here is where the sequence of returns risk comes into play, that is if you’re not spending your money. If you’re actually drawing down your assets, and this is a 5% withdrawal rate. 5% could be high for some people in this room, it could be low for some people in this room. But a 5% withdrawal rate, if you lose 10%, it takes 44% to make it up. If you lose 20%, you have to have a 62% return to make it up. And if we lose 30%, you have to have an 85% return to make it up. So what does this mean? This means you have to have a plan. You have to be in control and understand where your money’s going to come from.

Now in our office, everyone in this room I’m sure has gone through a risk score with us. We’ve talked about risk. We’ve always said that most people in this industry think of risk and it’s very subjective. They want to know are you conservative, moderate, or aggressive. That’s it. Conservative, moderate, or aggressive. And they try and fit you into those holes. And they’re going to ask you questions to determine if you’re conservative, moderate, or aggressive. The problem is, my definition of conservative is different than Sean’s, is different than my dad’s, is different than Erin’s. Your definition of conservative is going to be different.

So what we’ve used for many, many years is a risk score. It takes the subjectivity out of it, it makes it completely objective. Risk scores range from one to 99. Every 40 is the same as every other 40, every 30 is the same as every other 30. It makes it simple. And then you can go back. And investments are kind of like baseball cards where you have all sorts of statistics about them. You can go back and you can build scores and you can build portfolios to a score.

So what is your score? What should your score be? Well, for a long time we ran people through a very complicated questionnaire. And we still do sometimes. But we realized of what people were going through is they had this experience where they’re retiring in the best time of history. They didn’t feel like they could lose money. If they did, it was just going to come back real fast anyways. And so when we gave this quiz, the scores came out really high. I had an 82 year old widow. She sat down with me and when she did the quiz, her risk score came out at an 84. That doesn’t make any sense. I’d be sent to jail.

Now something as we’ve gone further and we listen to other people, historically they’ll always tell you, the older you get in theory, the less risk you should take. Now, your age is not the only thing that determines your risk. But what we’ve started using is what we call the rule of 100. If you take your age from 100 and subtract it from 100, it’s a good ballpark estimate of where your risk score should be. So for a 65 year old, 35 would be a good risk score. Now, is there reasons to have more? Yeah, there’s reasons to have a higher risk scores. Is there a reason to have a lower risk score? Yeah, there’s reasons to have a lower risk score, but it’s a general rule of thumb that could give you something to think about.

Now, one of the things that I wanted to point out, if you guys want to reevaluate your risk, if you haven’t done that with us in a while on that response form, you can check that box off, the next time we talk to you, we’ll make sure we go through that in depth with you and make sure you’re comfortable there. But how do we lower risk? How do we do that? Now, historically we’ve used bonds. Historically, the way you reduce risk is you add bonds to a portfolio.

Now, I always want to tell people bonds serve a purpose. The purpose of bonds in a portfolio is to protect on the downside. So whatever percentage you allocate to bonds, it’s supposed to provide you downside protection if the market ever collapses. And at the same time it’s supposed to pay you a decent interest rate for having your money there. So the old theory there is bonds are always going to be that safe part of your investments.

The problem with bonds, and we’ve been shouting this from the rooftops for the last six years, is bonds operate in an inverse relationship to interest rates. They’re not priced like stocks. So as interest rates fall, bond values mathematically have to rise. As interest rates rise, bond values mathematically have to fall.

And I want to look at this graph here. There’s two parts that make up to bond returns. Bond returns are made up by the income, that’s the interest they pay you. And the price appreciation, that is the value change of the bond. And this is the US Aggregate Bond Index. In the ’80s, 11% of the bond’s increase was made up of the interest rate. 1.7% was made up of just it going up a little bit in value. In ’90s, it was actually a smaller deficit there. It was or 7.6%. And then the interest rate kept falling. Interest rates kept falling and falling. And you’re going to notice the blue section gets higher and higher. What does that mean? That means the growth of bonds, if you’ve had bonds in your portfolio over the last 10 to 15 years, the growth you’ve seen is not because the interest rates you’ve earned is so good, it’s because of the fact that interest rates have been falling, the value of your bonds has to increase.

But what happened this year, there’s been a lot of investors, especially 401(k) investors, who have gotten smacked around two ways till Sunday. And the reason is because traditionally the only way that you could go to safety was use a bond portfolio. The US Aggregate Bond Index this year was down 17.5%. Don’t worry, it did earn 1.8% of interest for a total loss of 15.7%.

So if you were in the gold standard portfolio, many people consider this to be the old fashioned, set it and forget it gold standard 60/40 portfolio, this year 60% of your portfolio was in equities, 40% was in bonds. As of October 31st, you would’ve lost about 20% in your equities and 17% in your bonds. That’s the safe portfolio.

Now let’s talk about the 60/40 portfolio. The 60/40 portfolio historically has been phenomenal. It’s done great. If I look here historically over the last… This chart dates back to 1976. Since that time period, this return would’ve averaged 10.9%. That’s a great set and forget it rate of return, that’s a great, “Just rebalance and you’re totally fine.” Now, how is that derived? Of that same time period, the US stock returns would’ve been 13.4% and the bond returns 7.3. Remember those numbers. 13.4 and 7.3, because what we have to look at is going out into the future.

As we look at going out into the future, what is a 60/40 portfolio looking like? This is a prediction from four of the largest money managers in the country, JP Morgan, Goldman Sachs, BlackRock, and State Street. And they were asked, “What do you predict your capital market expectations were over the next 10 years?” And they said the stock market index came in at 6.87% on average. You can see somewhere higher, somewhere lower. Goldman Sachs is at 8.1 and the low guy was JP Morgan at 5.16. The bond index at 3.64, the spread wasn’t quite as big there, but that’s what the four of the largest money managers of the country think the next 10 years are going to look like.

In a 60/40 portfolio, that would mean the next 10 years would average 5.6%. That portfolio, just so you know, I put it into our risk software this afternoon, comes in at a 53 risk score. It’s a 53 risk score. So we’ve been looking for bond alternatives with all sorts of things for quite some time.

Now, where am I here? Where do we go from here? I told at the beginning about the dream. I hope you all sat down and wrote it down. I was in a business building workshop a little bit ago, a couple weeks ago, and they were talking about hope. And I am really positive. I think I talked in the psychology of money about my father’s attitude speech and it has stuck with my entire life. I think your attitude says a lot about what’s going to happen to you for the rest of your life. And as I tell my kids, it’s not what happens to you in this world, it’s how you react to it.

And the same is true for here. I said to our team, “I want to make sure that we, as we talk to our clients, encourage them that the best is yet to come. We haven’t even experienced the best part of your lives yet.” Now that being said, there’s a purpose behind it. What I just went through was not designed to scare you. In fact, a year ago we were here and Tom Siomades was speaking. And I thought he was downright depressing. I walked out of there and I drove him back to… He was staying at the Westin over in Lombard and I drove him back there. I said, “Well, that was not uplifting.” And he goes, “I just don’t see a lot of good out there right now.”

Now is a time, and we have a little bit of time, but now is a time that I want you really to think about your future. I want you to think about what you really want. I’ve said this over and over again. Some people like this saying and some people hate it. To me, it rings true and there’s a lot of behind it, but it’s my father’s saying. He says, “If you’ve already won the game, why do you keep playing?” Now, we never give up. We never stop. You have to be on your toes. But what are we playing for? What are we trying to achieve?

There are very few people that I talk to that your goal is to leave your children as much money as humanly possible. There’s a few of you in this room, but very few. There’s very few of you who, if you did 20 times better in the stock market, would change your lifestyle. Now is a time that I think we need to start looking internally. And as we’re making decisions, make sure you have your plan in place. I think most of you in this room are in great shape, but that’s because we are going off of what you have told us of what you’re okay with. Now, if we think you need something different, we will tell you. But don’t be afraid to tell us at the same time.

Now, where do we go from here? This is actually I’ve said this before. I hate when people come to me with a problem and don’t give me a solution. There’s some good possibilities and some opportunities that weren’t there a year ago. As we’ve seen interest rates rise, there’s some things that we can do that we didn’t have before.

So to wrap this up, to go back to my airplane, next week I leave a week from today, I’ll be in Orlando, Florida with my children for three days in Disney before we go over to my parents to celebrate my dad’s 70th. When I get on that plane, I fully expect it to land in Orlando in two and a half hours. Maybe three. If it ends up in Fort Worth or Denver, I’m going to be mad. I’m going to Orlando. The pilot knows where we’re going. The pilot puts out all those little tools and instruments. He’s going to watch everything. We want you guys to make sure you know where you’re going. We can help you fly that plane. We can help you dial those instruments in exactly how you want it to be. And for a lot of you, we’re really, really good at doing that.

If you have any questions or need any help with anything in the future, I don’t want you to put it off. We’ve got time. I don’t think we need to do it tomorrow, but I do think over the next six months we need to have a conversation and make sure that everyone here is feeling comfortable with where they’re at right now and what’s going forward.

And I promised, I was talking about the election tonight. The election outcome may have a short term impact. The gridlock could be good. The market dropped today, but the gridlock could be good, but it doesn’t impact the long term. You guys aren’t here, you’re not living for the next six months. You’re living hopefully for the next 20 to 30 years. And that’s the plan that we want to make sure that is being implemented and that you’re following through as we go on here.

I hope you enjoyed the talk from The Morton Arboretum on November 9th, and it’s always wonderful to get a room full of our clients and friends. We had some wonderful feedback from those that attended!

If you would like to talk to someone at FSR about the information that we went through in that presentation, like we do with all of our clients, we would love the opportunity to spend 15 minutes seeing if you are set up in the appropriate manner.

Below this video is a link to my calendar. Feel free to book any time that works for you, and we can discuss all the things that we talked about in the video. With that, I hope you guys have a wonderful holiday season and hopefully we’ll talk to you soon.